City, county, and school districts levy property taxes on properties within their boundaries. Funds are used to support infrastructure and provide services. The combination of these regional taxes creates a total tax rate, known as a mill rate, for a region. This rate is multiplied by a property's assessed value to determine the tax burden.
Key Takeaways
- Cities, counties, and school districts levy taxes against the properties within their boundaries.
- Property tax rates for each jurisdiction are calculated separately and the levies are added together to determine the total tax rate, called a mill rate, for an entire region.
- Property taxes equal the mill rate multiplied by the assessed value.
- The state with the highest effective property tax rate is New Jersey (2.08%) and the lowest is Hawaii (0.26%) as of 2022 (latest information).
Taxation
Property taxes are a major source of income for city and county governments. Their boards, councils, and legislatures meet to decide the appropriate rates. Budget hearings commonly determine how moneyis allocated to various community services such as education, transportation, emergency, parks, recreation, and libraries.
The Tax CutsandJobs Act(TCJA) placesa cap of $10,000 per year or $5,000 for those married and filing separately on the federal tax deduction for state and local taxes (SALT). This figure includes all real estate, income, and sales taxes onproperty. This provision is set to expire after 2025.
Every city, county, and school district can levy taxes against the properties within its boundaries.
Determining a Property's Value
Property taxes are calculated by multiplying the mill levy by the assessed value of the owner’s property. Different property types have various taxes assessed on the land and its structures. Vacant land will have a significantly lower assessed value and lower tax bill than an improved property. The land assessment might be higher if there is access to public services, such as sewer, water, and gas.
The assessed value first estimates the reasonable market value of a property, based upon prevailing local real estate market conditions. The assessor sends the assessment to the owner and follows it up with a tax bill. Tax assessments may be performed annually or every several years depending on the community where the property is located. The assessor determines market value using one or all of three methods that include:
- Sales evaluation: The assessor values the property using regional comparable sales. Criteria include location, the condition of the property, any improvements, and overall market conditions.
- Cost method: The assessor determines property value based on how much it would cost to replace it. Assessors consider the depreciation of the property and the costs of building materials and labor.
- Income method: This method is based on how much rental income the property can generate. The assessor considers maintenance and management costs, insurance, and taxes when using the income method.
Note
A property's assessment is part of the public record. Owners can see how much tax they pay through the assessor's website or local county office.
Calculating Property Taxes
Property taxes are calculated based on the value of the property. This includes both the land and the buildings on it. The single tax rate for a property combines all local rates applied from the county, city, and school district.
This aggregate rate is referred to as the mill levy. The mill levy is the total tax rate levied on your property value. One mill represents one-tenth of one cent. One mill equals $1 for each $1,000 of assessed property value.
Suppose the total assessed property value in a county equals $100 million. The county needs $1 million in tax revenues to run its operations. The mill levy would be $1 million divided by $100 million, or 1% for the county. If the school district has a mill levy of 3% and the city has a mill levy of 0.5%, the total mill levy for the region would be 4.5% (1% + 0.5% + 3%) or 45 mills.
If a homeowner's property value is $500,000 and the assessment rate is 8%, the assessed value would be $40,000. Taking the mill levy of 4.5%, the tax due would be $1,800 ($40,000 × 4.5%).
Effective Property Tax in Each State
As property taxes vary by community and the value of property taxes fluctuates as housing prices fluctuate, among other factors, using the effective tax rate of each state can be a useful method of comparison.
The effective tax rate is the average residential property taxes paid as a percentage of home value. Below are the effective tax rates for each state as of 2022 (latest information) as provided by the Tax Foundation.
| Effective State Property Taxes 2022 | ||
|---|---|---|
| State | Effective Tax Rate | Rank |
| Alabama | 0.36% | 49 |
| Alaska | 1.07% | 16 |
| Arizona | 0.45% | 47 |
| Arkansas | 0.53% | 39 |
| California | 0.68% | 34 |
| Colorado | 0.45% | 46 |
| Connecticut | 1.78% | 3 |
| Delaware | 0.48% | 42 |
| Florida | 0.71% | 31 |
| Georgia | 0.72% | 29 |
| Hawaii | 0.26% | 50 |
| Idaho | 0.47% | 44 |
| Illinois | 1.95% | 2 |
| Indiana | 0.71% | 30 |
| Iowa | 1.40% | 9 |
| Kansas | 1.26% | 13 |
| Kentucky | 0.74% | 27 |
| Louisiana | 0.51% | 40 |
| Maine | 0.96% | 21 |
| Maryland | 0.95% | 22 |
| Massachusetts | 1.04% | 17 |
| Michigan | 1.24% | 14 |
| Minnesota | 0.98% | 19 |
| Mississippi | 0.70% | 32 |
| Missouri | 0.82% | 23 |
| Montana | 0.69% | 33 |
| Nebraska | 1.44% | 8 |
| Nevada | 0.44% | 48 |
| New Hampshire | 1.61% | 4 |
| New Jersey | 2.08% | 1 |
| New Mexico | 0.67% | 35 |
| New York | 1.54% | 6 |
| North Carolina | 0.63% | 36 |
| North Dakota | 0.97% | 20 |
| Ohio | 1.30% | 11 |
| Oklahoma | 0.76% | 25 |
| Oregon | 0.77% | 24 |
| Pennsylvania | 1.26% | 12 |
| Rhode Island | 1.23% | 15 |
| South Carolina | 0.46% | 45 |
| South Dakota | 1.01% | 18 |
| Tennessee | 0.48% | 41 |
| Texas | 1.47% | 7 |
| Utah | 0.47% | 43 |
| Vermont | 1.56% | 5 |
| Virginia | 0.72% | 28 |
| Washington | 0.76% | 26 |
| Washington D.C. | 0.57% | (37) |
| West Virginia | 0.55% | 38 |
| Wisconsin | 1.38% | 10 |
| Wyoming | 0.55% | 37 |
What States Have the Lowest Property Taxes?
The top three states with the lowest effective property taxes are Hawaii (0.26%), Alabama (0.36%), and Nevada (0.44%).
What States Have the Highest Property Taxes?
The top three states with the highest effective property taxes are New Jersey (2.08%), Illinois (1.95%), and Connecticut (1.78%).
How Do You Pay Property Taxes?
You can pay your property taxes either with your monthly mortgage payment or directly to your local tax office. Most borrowers pay a monthly payment to their mortgage service provider, which includes the mortgage and property taxes.
When Do You Stop Paying Property Taxes?
Generally, as long as you own a home, you must pay property taxes. Even if your home is fully paid for, you will have to pay the property taxes. If you are an elderly person, usually starting between the ages of 61 and 65, you may be eligible for property tax exemptions.
The Bottom Line
The amount of property taxes depends upon how the tax is calculated. Some cities allow residents to view or pay their property tax bills online. Property owners should remain educated by knowing how their taxes are calculated, when the billing cycle is, and how their assessment was determined.
