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It seems like we pay taxes on everything. A slice of your income, a portion of purchased goods, and even a percentage of your home’s value is taxed.
If you don’t plan ahead, property taxes may come as a surprise cost to new homeowners. Even though property taxes serve an important purpose they can be one of the more expensive and surprising aspects of homeownership. According to 2020 data from The Tax Foundation, a Washington D.C.-based nonprofit that monitors tax policies, the highest property tax rates belong to the state of New Jersey at 2.13%. On the other end of the spectrum, Hawaii has the lowest property tax rate, coming in at 0.31%. These may seem like small numbers, but they add up and can range from $200 to $10,000 per year depending where you live.
That’s why it’s important to pay attention to property taxes, how to calculate them, and the different ways to pay them before you buy a home.
What Is Property Tax and How Does It Work?
Towns and cities tax property owners as a way of generating income that funds services and community needs, such as infrastructure, schools, hospitals, and fire departments.
Property owners are taxed based on the value of the property and the local tax rate. That means the amount you’ll pay in taxes is determined by how much your home is worth and where you live.
How to Calculate Property Tax
Many real estate shopping sites, like Zillow and Redfin, will provide an estimate of property tax costs on each online listing. Many real estate agents will have a general idea on the local rates too. But if you want to accurately calculate how much you’ll pay in property taxes you need two critical pieces of information:
- Assessed property value
- Your local tax rate
You then multiply the assessed value of the property and multiply that by the tax rate like this:
Assessed Value x Tax Rate= Property Taxes
The assessed value of a property is an objective measure of how much a home is worth. It is typically determined by a local tax assessor, and it’s re-evaluated periodically. While it’s similar to the market value of your home, the two numbers are not always the same.
“Assessed value takes into account the overall quality and condition of the property, local property values, square footage, home features, and market conditions,” said Tricia Turner, a Realtor and founder of Tricia Turner Properties Group in Texas.
Nearby home construction or desirable amenities — like public transit or shopping centers — can also increase the assessed value, said William Matthews, a real estate investor and author of “Everything I Needed to Know About Money I Learned From My Broke @$$ Friends.”
The tax rate is a percentage of the assessed value that you will owe in taxes. This varies by location and by the type of property. Property taxes are also influenced by the needs of the municipality. If your town or city needs more money to fund schools or infrastructure, for example, it may raise the tax rate to generate income.
You can find the tax rate in any area by visiting the official government website for your city, town or county. You can do an internet search for: “[Your city] property tax rate.” Most official government websites have .gov in the web address.
Here are a few examples of how property taxes are calculated in the cities of Los Angeles, Westchester, and Charlotte.
|Tax Rate (2019-2020)||Assessed Home Value||Property Tax (Per Year)|
|Los Angeles, CA.||1.2%||$500,000||$6,000|
What Is Property Tax Used For?
Property tax is generally one of the largest sources of revenue for any town, city, or county. For example, it helps finance salaries, supplies, building costs, and other resources for public school systems. Property taxes also fund major municipalities such as law enforcement, libraries, fire stations, and court systems. It typically is used to fund local infrastructure such as roads, water and sewer systems, and garbage collection.
How to Pay Property Tax
There are generally two ways to pay property taxes:
- Directly to your city or county.
- Through your mortgage lender.
If you elect to pay taxes directly to your city or county, you’ll receive a bill in the mail and can send in a check or pay online. They’re usually due in January each year.
Think carefully about whether you prefer to pay your taxes directly or through your mortgage lender. Each approach has its pros and cons.
But according to Matthews, most homeowners opt for the second option. “The majority of homeowners have their property taxes escrowed into their monthly mortgage payment. What this means is your mortgage company puts a portion of your monthly mortgage payment aside to pay your property taxes when they are due,” said Matthews.
Here are the differences between the two methods:
|Paying Directly to City or County||Paying Using Escrow Funds|
|You have control over how and when you send in your payment.||Your taxes are paid automatically by your lender so don’t need to worry about it.|
|You run the risk of missing your tax bill or sending in your payment late, which leads to penalties.||Your monthly mortgage payment is higher to account for the money your lender is paying in taxes on your behalf.|
|You have the option to pay in a lump sum once a year, or quarterly.||You’re paying an estimated portion of your taxes monthly.|
Property Tax FAQs
Where do I pay my property taxes?
If you pay your taxes directly, you’ll receive a bill with instructions to pay on your city or county’s website, or send them a check by mail. If your lender is paying on your behalf, they will take a portion of your monthly mortgage payment.
Why do we have to pay property taxes?
Each municipality is slightly different, but most property taxes are used to fund essential public services that we all rely on: Schools, hospitals, police and fire departments. Although cities have other sources of revenue (like sales tax), property taxes often generate some of the largest amounts of money.
How do I find my local property tax?
Start by searching your city or county website for a tax information page. Taxes are public record so you’ll be able to see the tax rate and even look up your specific property.