What Are Property Taxes and How Do You Calculate Them?

The term “property taxes” probably doesn’t make you smile but think of them this way: they provide the funds for important community services we all use practically every day. Property taxes assist city-serving institutions like - schools, transportation, police and fire services, parks, and libraries.

City and county governments decide appropriate rates and hold hearings to determine how money is allotted. While not every citizen may agree on the results, one thing is certain: The funds largely come from their homes, and in some states, vehicles and boats. 

So how do property taxes work, and how are they calculated? Let’s dig into that below. 

Who Sets Property Taxes? 

City, county, and school districts levy property taxes on homes within their limits. These total taxes create a “mill rate” for a region. “Mill” comes from the Latin word millesimum, meaning “thousandth”. For property taxes, one mill is equal to $1 in property tax levied per $1,000 of a property's assessed value. We’ll come back to this concept momentarily.  

How Is Property Value Determined? 

Your property taxes are based on the “assessed value” of your home, but that’s not the same as your home’s market value or the appraised value you’d get during a homebuying transaction. Instead, an assessor from your local Property Valuation Administrator (PVA) office will determine the assessed value.

The assessor typically uses an “assessment ratio” - the percentage of the home’s value that’s taxable. Interestingly, this percentage is often lower than the fair market value of your home. This is because the assessed value typically doesn’t take into consideration factors like market conditions that fluctuate frequently. It’s based on factors that are unlikely to change over time, like the size of the property, condition, location, and accessibility to water and other services. 

So, if your home’s market value is $350,000 and your local government taxes 70% of the value, your home’s assessed value would be $245,000 instead of $350,000. Obviously, the good news here is, though you want your market value to grow over time, it’s better for the assessed value to be lower because your taxes are lower. Ahhh, the government. 

Exemptions

Here’s more good news. Your property can also qualify for exemptions that lower or eliminate your property taxes. Check out this list, and ask your local PVA for more information:   

• Homestead Exemptions: Discount for living in the property full-time (versus a vacation or investment home).  

• Senior Citizen Exemptions: Discount or fixed tax rate for homeowners of a certain age living in the property full time.  

• Disability Exemptions: Reduction or elimination of taxes for homeowners with disabilities. 

• Veteran Exemptions: Potential discounts, depending on your local government, for Veterans and active-duty military. You’re not required to have a U.S. Department of Veterans Affairs (VA) loan to qualify.

• Agricultural Exemptions: Reductions granted to homeowners using their property for farming, ranching, or other agricultural purposes. No U.S. Department of Agriculture (USDA) loan required.

Tax assessments are typically performed annually, but in some communities, they might occur only every few years. Because property assessments are public record, homeowners can review their property taxes on the PVA's website. 

How to Calculate Your Property Taxes 

While you won’t need to calculate your property taxes on your own, it’s helpful to understand how the PVA arrives at a figure. Property taxes are typically calculated by multiplying the property’s assessed value by the local tax rate, like so:    

1. Look up your property’s assessed value and mill rate on your PVA website. 

2. Deduct any exemptions. 

3. Take your mill rate and divide it by 1,000. Then multiply by the assessed value and there’s your property taxes.  

For example, if your area's mill rate is 6.5 and your home’s assessed value is $300,000:  

• 6.5 divided by 1,000 = $0.0065  

• $300,000 x $0.0065 = $1,950  

You’d owe $1,950 in taxes per year or $162.50 per month – or less depending on exemptions. 

This brings us, finally, to how you pay your property taxes. 

How Property Taxes Are Paid 

Localities collect property taxes annually, quarterly, or semi-annually. Regardless, most homeowners choose to “set it and forget it” by including their property taxes within their monthly mortgage payment. The funds are held in an escrow account so they never fall behind, protecting both themselves and the lender from liens or default.

Homeowners with stable income might waive the escrow account so they can put that money toward other uses, like investments. Waiving escrow, however, may come with a lender fee charged as a small percentage of the total loan amount or a slightly higher interest rate. Additionally, rolling your taxes into your mortgage payment saves you from having to pay a lump sum to your local government one or more times a year. Note, too, that if you’re seeking a Conventional mortgage, lenders likely won’t let you pay your own property taxes unless you have a loan-to-value (LTV) ratio under 80%. Meanwhile, Federal Housing Administration (FHA) loans require your taxes be escrowed.

Taxes Don’t Need to Be Taxing 

While property taxes are unavoidable, at their heart, they’re intended to create a safe, healthy neighborhood with critical resources for you and your family. Hey, instead of focusing on that monthly bill, check out our tips on ways to save each month of the year. And if you have questions, Atlantic Bay is always here to help!