Property tax is a local government 'ad valorem' tax -- a tax on the assessed value of real estate owned, most often a house and the land where it sits, paid to a local government by the owner.
Property Tax Definition
When you purchase a home or piece of property, if it is within an "incorporated" or even unincorporated area, the tax you pay to local government for municipal services such as police and fire protection and, in some cases, water or sewer or a school district or trash collection, is often called "property tax."
How Is Property Tax Calculated?
To calculate the property tax, the tax rate determined by the municipal authorities is multiplied by the current market value of the property -- an assessed value of the home and land on which it sits.
Often, the tax rate is recalculated annually, so home and other property owners can't really determine based on a prior year what their tax will be in the current year. The rate is also based on what a municipality perceives as the needs for the municipality, such as infrastructure improvements, public service expansion and even schools.
Property taxes are levied on "real property," meaning usually property that is fixed and cannot move, like land, a house, or other fixed structures. Items that can be moved, such as clothing or televisions, while "personal property," aren't subject to taxes on "real property."
The local taxing authority, usually a municipality, will often hire a tax assessor to assess the value of real property within the jurisdiction of the taxing authority. Some places elect their tax assessor, while others merely hire or appoint them. The assessor's job is to assign a property tax to owners based on assessment of the current "fair market value" -- often calculated by comparing it to similar properties that have sold within the year. That value becomes the assessed value for the property.
The schedule of payment for property taxes varies with the taxing authority. In many places, it is quarterly installments. Almost everywhere that property taxes are assessed, however, there is a means for property owners to discuss the amount owed with the assessor, or even formally contest the assessment.
But it is one of the dichotomies of modern living that homeowners naturally want to get the highest price possible for their property when they sell it, but they don't want their property assessed at that price because of the taxes.
When a neighborhood's property values go down, it makes it harder for an assessor to maintain the assessment. However, even without the tax rate increasing, if the property's assessed value is increased, the homeowner will wind up paying more tax.
If an owner forgets or refuses to pay the property taxes, the taxing authority can and often does assign a lien against the property, meaning that before anyone else gets paid in the event of a home sale, the taxing authority gets paid first.
Property Tax Example
Your town charges a property tax rate of 4% for residential properties, and the assessed value of your home is $400,000. You owe your town property taxes of $16,000 for the current tax year.
Here's another example. Your house is assessed at $200,000; the land your house is on is assessed at $240,000. You live in the same town as before, with a property tax rate of 4%. The combined value of your house and property is $440,000. Your tax for the year, paid quarterly, is $17,600. Your escrow, built up by monthly mortgage payments, should pay $4,400 every quarter.
Property taxes vary by state and county. The median property tax in New Jersey, for example is 1.89%, while in Louisiana the median is .18%, according to Tax-Rates.org.
What Is Property Tax Used For?
Property tax is the oldest tax levied in the U.S., and the only major tax common to all 50 states, according to the University of South Carolina's Institute for Public Service and Policy Research.
Other taxes, on income or purchases, help generate important revenue for government, but property tax has funded municipalities' functions and services since at least 1085, when William the Conqueror needed funds to pay for his army, so he commissioned the Domesday Book, a survey intended to assess the wealth and assets of his newly conquered land.
Taxes on purchases and income generate revenue, but property remains the most fundamental way to fund a municipality or state's activities.
You pay local, state and federal governments taxes to provide for the public services and activities they provide. But most of your property tax stays within the community in which you live.
Property taxes pay for road construction and maintenance, local governments' staff salaries, and municipal public service employees such as police, firefighters, and the local public works department. If your town has plants or decorations outdoors, it is your property tax that helps make it possible.
Your property taxes also pay for much of the organized recreation in the area, such as park maintenance, and any public land not owned or funded by the state. In addition, traffic lights, sidewalks, recreational trails or recycling centers, and plowing during the winter, as well as festivals and holiday celebrations. And, while free public education has been compulsory since at least the mid-1800s in the U.S., and school districts receive funding from a variety of sources, a lot of funding for public schools comes from local property taxes.
Frequently, homeowners complain about an increase in their property tax. While the tax rate -- the levy -- can be increased by the municipal government, or the amount of property tax to fund a school district's budget can be increased, often what happens is a reassessment of property values results in homeowners paying more taxes despite the rate not having changed, because the same tax rate is levied against a property assessed at a higher value.
As noted, one of the property value dichotomies is that homeowners naturally want their property's value to increase over time, for when they might profit by selling it, but the same homeowners worried about the effect on property values of various things complain when their property is assessed a higher value.
The tax rate is also sometimes referred to as a 'mil levy.' One mil is $1 per $1,000 of assessed value. If your town uses a mil levy to determine your tax bill, take the assessed value of your property, and multiply it by the mil levy, then divide it by 1,000.
As an example, let's use the property assessed at a combined value of $440,000. So, with an assessed value of $440,000, times a mil levy of 40, we wind up with $17,600,000. Divide that by $1,000, and you wind up with the same $17,600 tax bill as before.