How Do Property Taxes Work?

What Are Property Taxes?

Property taxes are taxes levied by local governments (cities and counties) to pay for services like schools, garbage collection, police and fire, water and sewage, roads, libraries, parks and other services. Although some jurisdictions also tax personal property like boats and cars, property tax is commonly understood to be a tax on real estate, including land and improvements (such as your house).

Anyone who owns property is subject to property taxes. Renters don't pay property taxes, except indirectly through the rent they pay to their tax-paying landlords.

How Are Property Taxes Calculated?

The formula your local tax assessor uses to calculate your property taxes may be complex. But the basic formula for estimating your property taxes is simple:

What's Your Assessed Value?

Your home's assessed value is determined by your local government assessor. Depending on the laws where you live, it may be the property's fair market value based on recent property sales, a percentage of that value or some other calculation. The assessed value of your property appears on your property tax bill, and may be recalculated periodically.

Note that assessed value, which is used for tax purposes, is different from appraised value, which is used in the home sales process.

What's Your Tax Rate?

Property tax rates can vary widely from one city or county to the next. Visit your city, county or state website for more information on property tax rates, or check with your local tax assessor.

Here's an example of how to estimate your tax bill. In the city of Los Angeles, the average property tax rate is around 1.26%. If you owned a home in Los Angeles with an assessed value of $900,000, your property tax would be:

• $900,000 x 1.26% = $11,340

Your property tax bill may include additional taxes for special assessments that aren't covered under your regular taxes. These projects might include school parcel taxes or sewer service charges, community projects like road repair or other infrastructure, or supplementary operational costs for police or fire departments.

How to Pay Property Taxes

Property taxes are typically included in your monthly mortgage payment and placed into an escrow account, which your lender uses to pay your taxes. Lenders prefer the escrow method because it prevents unpaid property taxes, which can result in liens against your property or even foreclosure to the taxing authority—both outcomes your mortgage company would obviously prefer to avoid.

Paying property taxes via escrow account also takes some of the responsibility off your shoulders, as there's no need to remember due dates or worry about missing payments. However, if you'd rather pay your property tax bill directly, you can request an escrow waiver from your mortgage servicer.

An escrow waiver typically requires meeting the lender's criteria for credit score, timely payments and loan-to-value thresholds. There may also be a waiting period before you can remove an escrow account from your mortgage loan.

Ways to Save on Your Property Taxes

Lowering your property taxes isn't easy. Unlike income taxes, where various deductions and credits may apply, property taxes don't have many moving parts. Property tax rates are typically fixed within a jurisdiction, meaning everyone pays the same tax rate. If you want to lower your property taxes, you'll usually need to find a way to reduce your assessed property value. Here are some options you may have open to you:

• Find a property tax exemption. An exemption lowers your property's assessed value based on a special circumstance. Exemptions vary from one jurisdiction to another, but common examples include exemptions for senior citizens, disabled people, veterans or homesteaders. Check with your local taxing authority to learn about exemptions in your area.
• Dispute your property's assessed value. If you think your property's assessed value is too high, you may be able to dispute it. Contact your local assessor's office to learn more about the dispute process in your city or county, then check comparable property values or document reasons why your property value might be less than assessed.
• Get an escrow waiver. If you'd rather pay your property taxes directly, you can lower your monthly mortgage payment. This move doesn't lower your property tax bill; it simply reduces your monthly mortgage payment amount if your lender will allow it.
• Deduct property taxes on your federal tax return. This may be an option for you if you itemize deductions. Your deduction limit can vary depending on your modified adjusted gross income (MAGI), but generally, individual taxpayers can deduct up to $40,000 ($20,000 if married filing separately) for state and local income taxes, sales tax and property taxes combined.

The Bottom Line

Property taxes can add thousands of dollars to your housing costs each year. If you're planning to buy a home or other real estate, estimate your property taxes in advance to get a clearer picture of what your regular costs will be. Although paying property taxes isn't fun, your taxes go toward providing valuable community services like schools, police, fire, roads and parks—amenities that make your community livable and your property more valuable.