How Does Property Tax Work?

Homeowners pay plenty of taxes on their property. Governed by the state and country tax levies, tax liability on every property depends on its location and value. It can be as low as your mortgage payment in some areas, while in others, it can be thrice times higher than the mortgage payment. 

Instead of just paying taxes, it’s important that you know how they are assessed, what property tax rates are, and what amount you have to pay.

This information is also important when you purchase a property. After all, as it appreciates, the tax amount also increases. If you know such peculiar details, you can avoid paying extra taxes. 


What is a Property Tax?

A property tax is levied on real estate (including home, business property, vacant land) by state, country, or local level governments. It is also known as ad valorem tax as it depends upon the value of the property.

In the U.S, all states levy property taxes. They are necessary for states to function properly and to fund various development projects.

As a general rule of thumb, we can say that property tax depends on the value of your property, but the process itself is pretty complicated. It consists of the following steps:

Determine the value of your property

First of all, the property appraiser determines the market value. The appraisal usually happens once a year, once every three years, or even less frequently. It depends on the importance of similar houses or lands in the surrounding area. Additional factors such as construction permits also influence the rate.

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After determining the market value, tax assessors apply the assessment ratioIt is the part of a property’s market value that subjects to tax. For example, Ohio taxes 35% of the property’s market value.

Whereas the assessed value or taxable value is the amount on which you pay the tax. So, if the property’s market value is $250,000 and the assessment ratio is 35%, the assessed value will be $87,500.The tax rate will then be applicable on $87,500.

Apply the property tax rates

Once the appraiser assesses the property’s assessed value, he can apply actual property tax rates.

Counties and cities set the tax rates annually. You can check your state’s tax rates by contacting the state’s comptroller or tax department.

➡LEARN MORE: Avoiding Property Tax Bills with an Escrow Account

Millage Rates or Mill Rates

The millage rate is the tax you pay on every $1,000 of home value.  A mill is expressed as a tenth of a penny, and one mill is equal to $1 tax for every $1,000.

  • To calculate the tax bill, multiply the millage rate by the home’s assessed value and divide by 1000.
  • Another way is to convert the millage rate to a dollar rate by dividing the mill rate by $1,000.

To understand it better, let’s consider an example:

If your local millage rate is 7.5 and the home assessed value is $150,000, you have to pay $0.0075(divide mill rate by $1000 i-e 7.5 ÷1000=0.0075) on every $1,000 of your home value as tax. Apply this rate to home value. 

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$150,000 x $0.0075 = $1,125

So, the tax bill would be $1,125

How do you pay your Property Tax?

Tax collection also depends on the state, country, and local rules. They may collect once every three months, twice a year, or once a year.

Depending on the location, you may submit it directly to the state tax agency or in the escrow account that the mortgage lender uses to pay your property taxes.