How is my property tax bill calculated?

Your property tax bill comes from two main factors: what your property is worth and your local tax rates. Let's break this down.

First, your local tax assessor determines your property's value for tax purposes. This is called the "assessed value" and may differ from what your property would sell for on the open market.

Next, local governments set tax rates (sometimes called millage or levy rates) to fund community services like schools, emergency response, and road maintenance. These rates are applied to your property's assessed value to calculate your tax bill.

For instance, a home assessed at $300,000 with a 1% tax rate would have a $3,000 annual tax bill. However, many homeowners qualify for exemptions, such as a homestead exemption, which reduces the taxable value before the rate is applied. If you had a $50,000 homestead exemption in this example, you'd only pay taxes on $250,000, lowering your bill to $2,500.

One thing to keep in mind is that your total tax rate often combines separate rates from different local authorities. Your city, county, school district, and special service districts may each set their own rates. This is why two similar homes in different areas can have significantly different tax bills.

How often will my property be reassessed for tax purposes, what might cause a reassessment, and why should I care?

Property reassessment timing varies depending on where you live. Some jurisdictions reassess annually, while others do it every few years or only when specific events occur. Understanding your local reassessment schedule is important because it directly affects your tax bill.

Several events can trigger a reassessment outside the regular schedule. The most common are making significant improvements to your property (like adding a room or finishing a basement), damage from natural disasters, changes in ownership, or major changes in your local real estate market.

Reassessments can significantly impact your tax bill, either up or down. If property values in your area have increased substantially since your last assessment, a reassessment could mean a bigger tax bill. Conversely, if local property values have declined, a reassessment should lower your taxes. Understanding when and why reassessments happen helps you plan for potential changes in your tax bill and decide if it's worth appealing an assessment you disagree with.

What happens if I fall behind on my tax payments?

The first thing you'll notice after missing a payment is that late fees and interest charges begin to add up to the overdue amount. These extra charges can accumulate quickly, making it important to address the situation as soon as possible.

If your property taxes remain unpaid, the tax authority may place what's called a "tax lien" on your property. Think of this as a legal hold that must be cleared before you can sell or refinance your home. This lien will also show up on your credit report and affect your credit score.

In more serious cases, when taxes go unpaid for an extended time, the tax authority can start foreclosure proceedings to sell your property and recover the unpaid taxes. In some areas, they might instead sell the tax lien to an investor, who can then pursue foreclosure.

But here's the good news: you have options. Many local tax offices understand that homeowners can face financial challenges and offer several ways to help. You may be able to set up a payment plan to catch up on your taxes over time. Some areas also offer tax deferrals, especially for seniors, disabled individuals, or those facing financial hardship. Your community might even have special programs designed to help homeowners avoid tax foreclosure through financial assistance or counseling.

Are there limits on how much my property taxes can increase each year?

It depends on the state. Some states and localities have laws that limit how much property taxes or assessed values can increase annually. These limits (also referred to as "caps"), help protect homeowners from sudden, significant tax increases due to rapidly rising property values. California's Proposition 13, for instance, generally restricts annual increases in a property's assessed value to no more than 2% as long as the property hasn't been sold or undergone significant new construction. This means that even if a home's market value increases by 10% in a year, the assessed value for tax purposes can only increase by a maximum of 2%. 

What are property tax exemptions, and how do I know if I’m eligible for one? 

Property tax exemptions help reduce your tax bill by lowering the taxable value of your property. Think of them as discounts that can save you money on your property taxes each year. Here are the most common types of exemptions you might qualify for:

• Homestead Exemption: Available to property owners who use the home as their primary residence. This is the most common type of exemption and can significantly reduce your property tax burden.
• Senior Citizen Exemption: While benefit amounts and age requirements vary by location, this exemption is usually available to those 65 or older.
• Disabled Person Exemption: Offered to homeowners with permanent disabilities, often requiring documentation from a medical professional.
• Veterans Exemption: Available to military veterans, disabled veterans, and, in some cases, their surviving spouses. The benefit amount often depends on service-related factors.
• Religious or Charitable Organization Exemption: Available to qualifying non-profit organizations that use the property for religious, charitable, or educational purposes.

The easiest way to check your eligibility is to visit your local tax assessor's or taxing authority's website. They'll have detailed information about available exemptions in your area, income limits (if any), application deadlines, required documentation, and how to apply. Remember that exemption rules vary depending on where you live, so what your friend got in another county might be different from what's available to you. 

Here are some essential things to keep in mind regarding exemptions: 

• Most exemptions won't automatically be deducted from your tax bill – you must apply for them.
• Some exemptions renew automatically each year, while others need to be reapplied for periodically.
• Watch those deadlines! Missing them might mean waiting until next year to get your exemption.
• If your circumstances change (like moving to a new primary residence), you may need to reapply.

Can I appeal my property tax assessment?

Yes, you can absolutely appeal your property tax assessment. If you think your property's assessed value is too high or doesn't match similar properties in your neighborhood, you have the right to challenge it. Good reasons to appeal your assessment include:

• Your home's value seems higher than similar properties nearby
• There are errors in your property description (wrong square footage, number of bedrooms, etc.)
• You've recently had an appraisal that shows a lower value
• Your property has damage or issues that might lower its value
• Recent sales of similar properties in your area suggest your assessment is too high
• You’ve been hit with a special assessment you feel is too high or unjustified

As with all things property tax, jurisdictional variations abound, but the overall processes involve the following steps.

• Check your assessment notice for the appeal deadline – don't miss it! Most jurisdictions give you 30-60 days after receiving your assessment notice to file an appeal.
• Do your homework before filing:
  • Gather photos of your property
  • Collect recent sales data for similar properties
  • Get a professional appraisal if you think it would help
  • Document any errors in your property description
  • Take pictures of property damage or needed repairs
• Contact your local assessor's office first. Sometimes, they can fix obvious errors without a formal appeal, saving you time and hassle.

Do I Pay My Property Taxes Directly, or Does My Mortgage Company Handle It?

Most homeowners have their property taxes handled through an escrow account, but some pay directly. Here's how to know which situation applies to you.

If you have an escrow account, your mortgage company handles everything. They collect a portion of your estimated property taxes each month as part of your mortgage payment, set this money aside, and then pay your tax bill when it's due. Think of it like a savings account specifically for your property taxes that your lender manages for you.

You can easily check if you have an escrow account by looking at your monthly mortgage statement – if your payment includes an amount for property taxes, you've got one. Many lenders require escrow accounts, especially if you made a down payment of less than 20%. However, if you made a larger down payment or have refinanced, you might be responsible for handling taxes yourself.

If you pay taxes directly, you'll receive a bill from your local tax authority once or twice a year that includes clear payment instructions and due dates. If you're a new homeowner and aren't sure about your situation, check your mortgage documents or give your lender a quick call before your first tax bill is due.

How Are Taxes Different for My Home Versus a Business Property?

Business properties usually face higher tax rates than homes in the same area. For example, if homeowners in your city pay a 1.2% property tax rate, business owners might pay 2% or more. This means a commercial building could have a substantially higher tax bill than a house of the same value, as local governments rely heavily on business property taxes for revenue.

The tax benefits are different, too. While homeowners often enjoy stable, long-term tax reductions through homestead exemptions, business properties usually don't get these standard breaks. Instead, businesses might qualify for temporary tax reductions called abatements, often designed to attract new businesses to certain areas. These can offer significant savings, but they eventually expire – something business owners need to plan for.

Even the way property values are determined is different. Your home's value will usually be based on what similar homes in the area have sold for. But for business properties, it's often based on how much income the property could generate. This means a successful business might see its tax bill increase as it becomes more profitable, while a struggling business might see its taxes decrease.

Are Property Taxes Deductible on Federal Income Taxes?

Yes, to some extent, and only if you itemize deductions instead of taking the standard deduction. The deduction falls under the State and Local Tax (SALT) deduction, which allows you to deduct state and local property, income, and sales taxes, subject to limits.

Since the Tax Cuts and Jobs Act of 2017, the total SALT deduction has been capped at $10,000 per year ($5,000 for married couples filing separately). This means that even if you pay more than $10,000 in combined state and local taxes, you cannot deduct the excess amount.

For many homeowners, the standard deduction is now higher than their total itemized deductions, meaning they may not benefit from claiming property taxes separately. However, itemizing can still prove beneficial for those in high-tax states or with significant property tax bills.  

Pro Tip: The SALT cap is set to expire at the end of 2025 unless Congress extends or modifies it. If no action is taken, the deduction rules could revert to pre-2018 levels, meaning taxpayers may once again be able to deduct a more significant portion, or under some situations, possibly even all, of their state and local taxes.

What if I rent? Who is responsible for paying the property taxes, and are they included in the rent payment?

If you're renting, your landlord is legally responsible for paying the property taxes (they're the property owner, so this obligation falls to them, not to you as the tenant). For commercial properties, some leases (especially for businesses) handle this differently through what's called a "triple net" lease. Under this arrangement, tenants pay property taxes, insurance, and maintenance costs directly on top of their base rent. 

What about personal property? Is that subject to tax?

Yes, in many jurisdictions, certain personal property can be subject to tax, but it's not as widespread as real property tax and varies by the type of personal property in question.   

• Vehicles: In many states, you must pay an annual property tax on registered vehicles, including cars, motorcycles, RVs, and boats. The tax amount is usually based on the vehicle’s age, value, and depreciation schedule.
• Business Equipment and Inventory: If you own a business, you may be required to pay personal property tax on business assets, such as office furniture, machinery, and equipment. Some states also tax inventory, though this is becoming less common.
• Household Goods and Personal Belongings: Most states do not tax personal property like furniture, clothing, or electronics. However, a few states technically allow taxation on high-value personal assets, though this is rarely enforced.

I received an inheritance that includes real property. What tax considerations might be involved? 

Inheriting property involves several tax considerations you should be aware of. When you inherit real estate, your local tax assessor may reassess the property at its current market value, which could increase your property tax bill. The good news is that some states offer special exemptions for inherited homes, especially when the property passes between parents and children or between spouses. Just remember these exemptions aren't automatic – you'll need to apply for them. Also, if the previous owner had tax-saving exemptions like a homestead exemption, you'll probably need to reapply to keep those benefits.

If you decide to sell the property, there's some good news about capital gains tax. Thanks to what's called the "step-up in basis" rule, you'll only owe tax on any increase in value that occurs after the previous owner's death. If you choose to rent out the property instead, you'll need to report the rental income on your taxes, but you can deduct expenses like property taxes, maintenance costs, and mortgage interest.

As for inheritance taxes, most people won't have to worry about federal estate tax since it only applies to estates worth millions of dollars. Some states do have their own inheritance taxes, though (generally with lower rates for close family members and higher rates for distant relatives). 

Pro Tip: if the property was transferred through something called an inter vivos trust (a living trust) rather than a will, it might be classified as a gift instead of an inheritance. This is significant because gifts don't receive the step-up in basis, which could mean higher capital gains taxes if you sell the property.

Have any follow-up questions? Every property tax situation is different, and if you need more guidance, AAL’s directory connects you with experienced attorneys who can help with assessments, exemptions, appeals, and more.