How is Property Tax Calculated?

How Property Taxes are Calculated

woman budgeting at kitchen table in house

Other than paying your mortgage (and perhaps your utilities), property taxes can be one of the biggest expenses involved with your home. But how are property taxes calculated? Typically, property taxes are set by a specific percentage, often referred to as a multiplier. When multiplied by the assessed value of your home, this determines your annual tax bill. 

How Property Assessments Work

Other than the multiplier, which is also often referred to as a mill levy, with one mill representing 0.1%, your assessed property value is the other major factor that will affect your tax bill. Properties are usually only assessed once every 3 - 5 years, so if the value of homes in your area drastically rises or falls, it could take a few years for your property tax rate to catch up.

When assessing the value of your home, a property assessor will typically look at:

  • Local Sales Evaluation: Using this method, the assessor will compare and contrast your property to similar homes that have sold in the area to determine an estimated selling price.

  • Cost Method: Using this technique, the assessor estimates how much it would take to replace your property in an attempt to determine its value.

  • Income Method: For this, the assessor will look at how much income you might be able to make if you rented out your home, minus expenses like taxes, management costs, and insurance.

The final part of the property tax puzzle involves the assessment rate, which can vary from county to county and can be anything less than 100%. You can multiply your property’s value by its tax assessment rate, and multiply that by the original multiplier in order to get your full tax bill.

For example, if your home is valued at $300,000, and the assessment rate is 30%, the assessed value is $90,000. If the multiplier, or mill levy, is set at 3%, your annual tax bill would be $90,000 * 3% = $2700.

Property Tax Rules and Exemptions Vary from State to State

In many states, homeowners can take advantage of what’s called a homeowner’s exemption. This is a law allowing homeowners to deduct a certain percentage of their home’s assessed value from their property tax calculation, as long as it’s for their primary residence. 

In addition, some states offer an exemption based on a specific amount, such as $40,000. In that case, a $200,000 home would only be taxed on the remaining $160,000. If the owner of the home decides to move their primary residence somewhere else, they’ll lose the homestead exemption and be required to pay property taxes on the full amount of their home’s assessed value.

Another unique law in some states, including California, provides that tax assessments for current homeowners can only increase by a certain percentage per year. Therefore, homeowners who have owned their home for many years will receive extremely small tax bills compared to people who are just purchasing a house.

If you would like to learn more about property taxes, fill out the form below and a home loan specialist will reach out to you