Property Tax Before You Purchase a Home

Property tax is right behind mortgage payments when it comes to factors that influence a home’s affordability. While buyers watch asking prices closely, they should also be tuned into property taxes.

Property Tax Before You Purchase a Home

In this article, we’ll cover property tax 101 to help you understand what taxes mean for you and your “buying power.”

What Are Property Taxes?

Property tax is a tax on a property’s value that is tallied and collected by a local government. The tax rate for property tax varies by location. How much you owe is determined by multiplying the local property tax rate by the property’s current assessed value. The assessed value is determined by local tax assessments that are conducted every one to five years.

Most local governments base tax levies on what is called real property, which includes the land, the main structure, and any other fixed buildings on the property.

The extra cost of property tax is something to consider when weighing the perks of buying versus renting.

When Is Property Tax Due?

Most municipalities collect property taxes semiannually, with two split payments due in January and June. However, many people work property tax into their monthly mortgage payments with help from their lenders.

Putting money in escrow is a convenient way to manage property taxes with help from your lender. The funds will sit in an escrow account until your tax bill is due. When the bill comes, your lender will pay it on your behalf.

Many people like this arrangement because it takes the burden of remembering to make payments off their shoulders while ensuring that property taxes are always paid on time. It’s also a great budgeting strategy to ensure that you don’t come up short when the tax bill is due.

How to Calculate Property Taxes on a Home

Property taxes are calculated based on state and municipal rules using something called a mill rate. With a mill rate, you’re paying a certain tax for every $1,000 of a home’s value.

The first step to determining a home’s property tax is looking up the local mill rate. Next, divide the mill rate by 1,000. Then multiply the home’s assessed value by that mill rate. This figure will be the annual tax bill for the property. Here’s an example of a home worth $300,000 in an area with a mill rate of 9.0.

  • Step 1: 9/1000 = $0.009
  • Step 2: $300,000 x $0.009 = $2,700
  • Step 3: Property taxes on this home are $2,700 per year

Why Do We Have to Pay Property Taxes?

Revenue from property taxes fund essential community services. Most property taxes go toward local public schools. Property taxes also fund police, fire, road maintenance, sewers, infrastructure improvements, libraries, and more.

What States Have the Highest Property Taxes?

Property taxes are determined based on a home’s value using square footage, parcel size, and other details. That means homes in high-cost-of-living (HCOL) areas come with pricier tax bills. You can’t do apples-to-apples comparisons for properties in different states.

A modest 1,500-square-foot ranch on half an acre in New Jersey may have a five-digit property tax bill that’s five to 10 times the tax bill on a palatial 3,000-square-foot home on a 5-acre parcel in West Virginia.

Generally, the Northeast has the highest property taxes in the United States. Higher taxes has to do with a mix of higher property values and higher local tax rates. According to data compiled by the Miami Herald, these are the five states with the highest average single-family property taxes for 2022:

  • New Jersey ($9,527)
  • Connecticut ($7,671)
  • Massachusetts ($7,044)
  • New Hampshire ($6,855)
  • New York ($6,673)

States in the South and Southeast tend to have the lowest property taxes in the country. Here’s a look at the states with the lowest average single-family property taxes for 2022:

  • West Virginia ($928)
  • Alabama ($1,022)
  • Arkansas ($1,228)
  • Louisiana ($1,296)
  • Mississippi ($1,311)

Of course, property taxes are subject to changes. As more people spread to the American South and West, local governments are seeing increasing needs for local services and infrastructure. As a result, many tax-friendly areas are being forced to increase rates on property tax. What’s more, increasing home values in any part of the country translates to higher property taxes.

What Happens If You Don’t Pay Property Taxes?

Property taxes outlive the life of a mortgage. That means you’ll still be paying property taxes after you fully own a home. They are due every single year from the time you purchase a home until the time you no longer occupy it.

While laws about unpaid property taxes vary by state, you are at risk of losing a home to a tax sale or foreclosure if you fail to pay property taxes. When a homeowner becomes delinquent with tax payments, the local taxing authority will issue a lien on the property. If the homeowner doesn’t resolve the issue by paying the outstanding tax bill or requesting abatement, the town or taxing authority will seize and sell the property.

Abatement is a reduction of property taxes based on a reduction of the property’s assessed value. Homeowners can request abatements if they feel that their homes have been overvalued by being assessed at a value higher than the true fair cash value.

Can You Qualify for Property Tax Exemptions?

In some cases, a homestead exemption can be applied to help certain homeowners afford their property taxes. Rules for homestead exemptions vary by state and local municipality. In most cases, they can be used by senior citizens, veterans, surviving spouses of veterans, and retired members of law enforcement with disabilities.

Is Real Estate Tax the Same as Property Tax?

People use the terms “property taxes” and “real estate taxes” interchangeably when talking about the local taxes that are owned on a property.

However, it’s possible that someone could be using the term “property tax” to refer to a specific tax that applies to some owned property that isn’t a home or parcel. In this case, personal property tax can apply to a long list of movable personal property that can include cars, trailers, mobile homes, personal planes, boats, and more.