The Clever Real Estate Blog

How Are Property Taxes Calculated?

December 30 2018
by Thomas O'Shaughnessy

Just how are property taxes calculated? When you get your bill, it might just seem like a jumble of arbitrary numbers. You know you have to pay it, so you write a check and move on, but you’ve probably also wondered how the local government arrived at that number in the first place.

We’ve got the formula for you here. This way, you can even double-check your property tax bill to ensure your fee is reasonable.

What are property taxes?

There’s an old Latin phrase “ad valorem.” Roughly translated, it means “according to value.” Property taxes are an ad valorem tax. This means that the local government determines how much you owe based on what they think your property is worth.

These taxes, although sometimes painful to pay, are an important source of community funding. The revenue helps to pay for local schools, fire departments, and libraries. They might even fund walking paths, parks, and playgrounds. If you ever wonder what your property taxes pay for, you can always request a spending record from your local government.

These services – such as education, transportation, emergency, parks, recreation and libraries – are funded by property taxes.

How do you calculate property tax?

The process begins when different local governing groups like the school board or the city council hold budget meetings to determine how much money they need for the coming year.

Mill Levy AKA Millage Tax

A mill levy is the rate of the taxes levied against your property’s value. This value includes both the land and all of the structures on it. One “mill” is one-tenth of one cent.

Think of it this way: For every \$1,000 that the property assessor says your home is worth, you would have one mill levied against you. However, it’s important to remember that city, county, and school districts all have the power to levy taxes against homes that exist within their boundaries.

So, each of these entities can calculate their tax rate, then once you add them all together, you have the total “mill rate” for the area.

Here’s an example:

Remember how we said that these governing bodies hold annual meetings to determine their financial needs for the upcoming year?

So let’s say a certain county has about \$200 million of property inside of it. Then, during the meetings, the county finds out it need about \$2 million to keep things running that year. So, the mill levy would be \$2 million divided by \$200 million. That equals 1%.

But that’s not all.

Next, the school district and the city council had these meetings as well. They did the math and need revenue of 4% and 0.4%, respectively. So then, the total mill levy for the region (i.e. the amount that you as a homeowner actually have to pay) would 5.4% (or 54 mills), which is all of these rates added together.

As an example of a mill-levy calculation, suppose the total assessed property value in a county is worth about \$100 million. Next, the county decides it needs \$1 million in tax revenues to run things in the county smoothly for that year.

The mill levy would simply be \$1 million divided by \$100 million, which equals 1%. Now, suppose the city and 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.

The Assessed Value of a Home

Okay, so now we understand how the governing bodies determine the tax rates…but how can we tell how much you actually have to pay?

Here’s how we know:

Using the example above, your total property tax rate would be 4.5% of your home’s assessed value.

Your local tax assessor’s office is the one who sets this value for your home. It’s either done once a year, or once every five years. The frequency of these inspections is based on local laws.

Here are the three methods the assessor might choose to use to determine the value of your property:

The Sales Comparison Method

In this method, the assessor compares your property to homes nearby that have sold recently. Then, he takes into account the features of your home that make it a little different and adjusts the price accordingly. His final number is what he thinks is a fair market value for your home.

The Cost Method

When an assessor uses the cost method, they calculate just how much it would cost them to completely rebuild your home from scratch. This will include all of the materials and the cost of any labor involved. It will also include the value of your land.

The Income Method

When using this method, the tax assessor makes a guess based on how much income you would likely be able to make from a certain property. This is usually the method used for commercial or business properties. The assessor has a look at things in the area like the going costs for maintenance, insurance expenses, and how much you can charge for rent.

How do you pay property taxes?

Homeowners usually receive their total property tax bill either once a year, or once every five years. Local laws determine the frequency. In the interim, if you go to the County Assessor’s website and enter your address, you can see how much you are likely to owe based on the most recent assessment of your home.

Sometimes, you have to pay a small fee to the county in order to access this information. If you don’t want to do it online, you can also always go to the County Assessor’s office in person at the county courthouse, although the fee would still apply.

To actually pay the taxes, you’ll usually find that your payments are bundled in with your monthly mortgage payments. However, sometimes that is not the case. Sometimes you must pay annually directly to your local tax authority. Sometimes these direct payments can be monthly as well.

It’s important to remember that state and local laws change frequently. For example, Beginning with the 2018 tax year, the Tax and Job Cuts Act put a limit of \$10,000 per year (\$5,000 for those married and filing separately) on which federal deductions you can use for state and local taxes. Sometimes, people give these taxes the nickname SALT.

These taxes include all real estate, income and sales taxes on property. Understanding which deductions apply and how property taxes are calculated will help prevent you from overpaying.

If you have any questions about your property taxes, or the taxes on a property you would like to buy, be sure to partner with your Realtor to ask the local taxation authority directly.