How To Calculate Property Tax

Property tax is an annual tax levied by local government on the value of real estate, and it funds schools, roads, emergency services and other local functions. It is charged on an assessed value set by the local assessor, not directly on the price a home would fetch.

The assessed value is often a fraction of market value, set by the assessment ratio. In some places the ratio is 100 percent, so assessed and market value are the same; in others it is lower, which reduces the taxable base even though the home is worth more.

Exemptions reduce the taxable value before the rate is applied. A homestead exemption, for example, shields a set amount from tax for a primary residence, and there are often additional exemptions for seniors, veterans or disabled residents. These are subtracted from the assessed value, not from the tax.

The tax rate is set by the local authority and expressed either as a percentage of assessed value or as a millage rate, where one mill is one tenth of one percent. Multiplying the taxable value by the rate gives the annual bill.

The effective rate on market value is often different from the headline rate, because the assessment ratio and the exemption both intervene. A 1.1 percent rate applied to a value assessed at 100 percent with an exemption produces an effective rate below 1.1 percent of the market price.

The bill is usually split into instalments, commonly two payments a year, and it is frequently escrowed into a mortgage payment so the lender pays it when it falls due. A rise in the assessment raises the escrow portion of the monthly mortgage payment.

Assessments are reassessed periodically, and a rise in market values can lift the assessed value even if the rate is unchanged. Many jurisdictions cap the annual increase in assessed value for a primary residence, which smooths the bill over time.

The tax is deductible against federal income tax for those who itemise, along with state and local income tax, up to a combined cap. For many households the standard deduction exceeds the itemised total, so the deduction has no effect.

Property tax is a major component of the cost of owning a home, and it is often underestimated by first-time buyers who focus on the mortgage. Including it in the affordability calculation prevents a surprise when the first escrow analysis arrives.

The rate varies enormously between jurisdictions. Two homes of equal value a few miles apart can face very different bills, because the local rate and the assessment practices differ. Comparing the effective rate, not just the market value, is the fair way to compare.

Appealing an assessment is possible if the figure looks wrong. A homeowner can present evidence of comparable sales or an appraisal to the assessor, and a successful appeal reduces the taxable value and the bill going forward.

The tax is charged on the property regardless of the owner's income, which can be a burden for a homeowner whose income falls, such as in retirement. Some jurisdictions offer deferrals or freezes for older residents to soften this.

The calculator applies the assessment ratio, subtracts exemptions and applies the rate to produce the annual and monthly bill and the effective rate on market value. It models the figures entered and does not know your local rules.