How Property Taxes Are Calculated

Every year, millions of homeowners pay property taxes. Property taxes are levied by cities, counties, and school districts on the properties within their boundaries, and are used by these organizations to provide services.

To calculate property taxes, all these levies are added together to work out the total tax rate—known as a mill rate—for a region. This rate is then multiplied by the assessed value of a property, so that people with more valuable properties pay more.

Key Takeaways

  • Cities, counties, and school districts in a region each have the power to levy taxes against the properties within their boundaries, and property tax rates for each jurisdiction are calculated separately.
  • Then, all the levies are added together to determine the total tax rate—what’s called a mill rate—for an entire region.
  • Property taxes are calculated by taking the mill rate and multiplying it by the assessed value of your property. 
  • The market value of your property is assessed by using one or a combination of three methods: performing a sales evaluation, the cost method, and the income method.
  • The market value is then multiplied by an assessment rate to arrive at the assessed value.

WATCH: How Are Property Taxes Calculated?

Assessing Property Tax

Different property types have various types of tax assessed on the land and its structures. For example, vacant land will have a significantly lower assessed value than a comparable piece of property that is improved, and as a result, it will have lower property taxes. If there is access to public services, such as sewer, water, and gas, then the land assessment might be higher. If the assessor feels that the land has the potential to be developed, it could lead to a higher assessment and more taxes for the owner. The amount that a property is taxed comes from a percentage of the assessed value of the property.

Property taxes are a major source of income for city and county governments. The different boards, councils, and legislatures meet to decide the appropriate rates. They hold budget hearings to determine how much money needs to be allocated for providing the various services required by the local community. These services—such as education, transportation, emergency, parks, recreation, and libraries—are funded by property taxes. 

Starting with the 2018 tax year, the Tax Cuts and Jobs Act placed a cap of $10,000 per year (or $5,000 for those married and filing separately) on federal deductions for state and local taxes (SALT). This figure includes all real estate, income, and sales taxes on the property.

Calculating Property Taxes

Property taxes are calculated using the value of the property. This includes both the land and the buildings on it. Typically, tax assessors will value the property every one to five years and charge the owner of record the appropriate rate following the standards set by the taxing authority. Assessors calculate that value using the mill levy—also called the millage tax—and the assessed property value.

Example of a Property Tax Calculation

The tax rate for a property is determined by how many city and school districts a property lies within, and adding together the rates applied by each. This aggregate rate is referred to as the mill levy. Generally, every city, county, and school district has the power to levy taxes against the properties within its boundaries. Each entity calculates its required mill levy, and they are then tallied together to calculate the total mill levy.

The mill levy is the total tax rate levied on your property value, with one mill representing one-tenth of one cent. So, for $1,000 of assessed property value, one mill would be equal to $1.

For example, suppose the total assessed property value in a county is $100 million, and the county decides it needs $1 million in tax revenues to run its necessary operations. The mill levy would be $1 million divided by $100 million, which equals 1%. Or, if the city and the school district calculated a mill levy of 0.5% and 3%, respectively, the total mill levy for the region would be 4.5% (1% + 0.5% + 3%) or 45 mills.

To calculate a tax bill, two further steps are required. First, a property’s value is assessed via one of the methods described below. Then, the value is multiplied by the assessment rate, which varies by jurisdiction and represents the percentage of a property on which taxes are due.

For example, suppose the assessor determines that your property value is $500,000 and the assessment rate is 8%. The assessed value would be $40,000. Taking the mill levy of 4.5% that we calculated previously, the tax due would be $1,800 ($40,000 × 4.5%).

3 Ways to Assess Property Value

Property taxes are calculated by taking the mill levy and multiplying it by the assessed value of the owner’s property. The assessed value estimates the reasonable market value for your home. It is based upon prevailing local real estate market conditions.

The assessor will review all relevant information surrounding your property to estimate its overall value. To give you the most accurate assessment, the assessor must look at what comparable properties are selling for under the current market conditions, how much the replacement costs for the property would be, the maintenance costs for the property owner, any improvements that were completed, any income you are making from the property, and how much interest would be charged to purchase or construct a property comparable to yours.

The assessor can estimate the market value of the property by using three different methods, and they have the option of choosing a single one or any combination of the three.

1. Performing a Sales Evaluation

The assessor values the property using comparable sales in the area. Criteria include location, the state of the property, any improvements, and overall market conditions. The assessor then makes adjustments in the figures to show specific changes to the property, such as new additions and renovations.

2. Cost Method

This is when the assessor determines your property value based on how much it would cost to replace it. If the property is older, assessors determine the amount of depreciation that has taken place and how much the property would be worth if it were empty. For newer properties, the assessor deducts any realistic depreciation and looks at the costs of building materials and labor, including these figures in the final value of the property.

3. Income Method

This method is based on how much income you could make from the property if it were rented. Using the income method approach, the assessor considers the costs of maintaining the property, managing the property, insurance, and taxes, as well as the return that you could reasonably anticipate from the property.

Assessed Value

After determining the market value of the property, the assessed value will be arrived at by taking its actual value and multiplying it by an assessment rate. That rate is a uniform percentage, varies by tax jurisdiction, and could be any percentage below 100%. After getting the assessed value, it is multiplied by the mill levy to determine your property taxes due.

Once the assessor has the value, they work in two stages: First, they send the assessed value of the property to the owner. Then, they follow it up with a tax bill.

Other Considerations on How Your Property Value Is Assessed

Most property tax assessments are done either annually or every five years, depending on the community where the property is located. After the owner has received their assessment with its property valuation, a property tax bill is mailed separately.

The information that the assessor has is considered part of the public record. Owners can see how much they must pay by going to the assessor’s website and entering their address. Sometimes they may be charged a small fee for accessing this material. Another option is to go to the assessor’s office in the county courthouse. Once you are at the county courthouse, you can look up the information and print out a copy for a nominal fee.

Why Is My Property Tax Higher Than My Neighbor’s?

In the majority of cases, this will be due to the assessed value of your home being higher. Your home may have a higher value if you have a larger plot of land, if your home is larger, or if your home has desirable features. In some rare cases, however, you may live in a different jurisdiction from your neighbor.

What State Has the Highest Property Taxes?

Across the United States, the mean effective property tax rate—total real estate taxes paid divided by total home value—was 1.08% for 2020 (the most recently available data), according to data from the Tax Foundation, a tax policy research organization. New Jersey had the highest rate in the country, at 2.21%. Hawaii had the lowest rate, at just 0.31%, followed closely by Alabama at 0.39% and Louisiana at 0.54%.

What States Have No Property Taxes?

All 50 states and the District of Columbia have property taxes. But some people may qualify for a property tax exemption. Certain states have homestead exemptions or exemptions for older homeowners, people with disabilities, military veterans, and homeowners who install renewable energy systems like solar panels.

The Bottom Line

Property taxes can be confusing. Paying the right amount requires understanding how the tax is calculated, where to get this information, and when tax bills are sent out and due. Some cities allow their residents to view and/or pay their property tax bills online. Property owners should do their part to remain educated by knowing how the taxes are calculated, when the billing cycle is, and where they can locate it. 

Article Sources
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  2. Tax Foundation. "Facts & Figures. How Does Your State Compare? 2022."

  3. Tax Foundation. "Where Do People Pay the Most in Property Taxes?"

  4. Solar Energy Industries Association. "Solar Tax Exemptions."

  5. National Association of Counties. "Property Taxes: A Look at Exemptions, Tax Limits and Assessment Cycles," Page 5.