How Are Property Taxes Calculated?

How Are Property Taxes Calculated? article image.

If you own a home, property taxes can be costly. Where you live will play a big role in how much you pay, but understanding all the factors that go into your tax bill can help you figure out ways to save. Let's go over how property taxes are calculated and what you can do to lower them.

How Property Taxes Are Calculated

Your property taxes are determined by the local tax assessor for your municipality. Assessors typically start by determining your home's fair market value, which they get by looking at comparable properties in the area and making adjustments based on the characteristics of your property.

Once the assessor establishes the fair market value of a property, it applies a residential assessment ratio (RAR) to get the property's assessed value. For example, let's say the fair market value of your home is $300,000. If the RAR for your local municipality is 30%, your assessed value is $90,000—that's what the assessor will use to calculate how much you owe.

Then they'll apply a tax rate called a millage rate that's determined by your town or city, school district or other municipality to the assessed value. If the millage rate is $15 per $1,000, you'll multiply $90,000 by 1.5% (or 0.015) to get a property tax bill of $1,350. That's 0.45% of your home's fair market value.

It's important to remember that a property's assessed value doesn't come into play when you buy or sell a home. Its sole purpose is to help your local tax assessor determine how much you owe in property taxes.

You generally won't pay your property taxes directly to your local taxing authority. Instead, your mortgage loan servicer typically estimates the amount you owe every year, divides that figure by 12 and adds the result to your monthly mortgage payment. In the above example, that comes out to $112.50.

That portion of the payment goes into an escrow account the mortgage servicer draws from to pay the tax bill when it comes due.

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How to Lower Your Property Taxes

While you can't avoid property taxes entirely, there are steps you can take to save money. Here are some options to consider:

  • Limit home improvements. Making improvements to your home will increase its value, which means higher property taxes. Find out when your tax assessment is performed and try to limit your home improvements, especially ones that can be seen in a drive-by appraisal, leading up to that date. If you make the renovations after your assessment, your bill will go up the following year, but you can enjoy the lower bill until then.
  • Check for tax exemptions. Some state and local governments offer tax exemptions to certain residents that could reduce how much you owe. Some exemption recipients can include seniors, homesteaders, veterans and property owners who use their properties for agricultural purposes.
  • Check your bill for inaccuracies. You'll typically get a copy of your tax bill from your local assessor. Once you have it, review it to make sure the information about your property is correct. If the fair market value is based on inaccurate information, you may be able to appeal it.
  • Do your own comparative market analysis. In addition to your home's characteristics, tax assessors also take into account comparable properties in your area. If you believe the assessor's fair market value is too high, you can do your own analysis of comparable properties in your area that have sold recently and use that information to attempt to appeal the assessment.
  • Get a second opinion. Another way to prove that your home's value is lower than what the assessor estimated is to get an appraisal from an independent professional. If the appraisal comes in lower than the fair market value on your assessment, you could file an appeal. Keep in mind, though, that this can cost a few hundred dollars.

One thing to keep in mind is that if you appeal your assessment, there's no guarantee that you'll succeed. It's important to go through the process only if you have enough evidence to support your claim.

Improve Your Credit to Lower Overall Housing Costs

While your credit history doesn't impact your property taxes, improving your credit score could help you reduce your total mortgage payment. You can achieve this goal by refinancing your mortgage loan with a new lender, or even with your existing one.

Check your credit score to get an idea of where you stand now and if you've improved your credit since you first bought your home. Then take steps to build your credit based on the areas you see in your credit report that need to be addressed.

This process can take time, but you could end up saving thousands or even tens of thousands of dollars over the course of your time living in the home.