A property tax is levied on personal property owned by individuals or legal entities like corporations. Property taxes are usually the single largest source of revenue for state and local governments.¹ Each government entity sets its own tax rate.

Property taxes are used to pay for a variety of necessary government programs and services. Programs these dollars help fund include (but aren’t limited to):

• Local schools
• Police departments
• Fire departments
• Road and highway construction
• Libraries
• Water and sewer improvements

Unlike income taxes, property taxes are generally considered regressive. This means that the lower someone’s income, the higher the percentage of their income they spend on the tax. This is because everyone pays the same tax rate, regardless of their income.

Property taxes are unique to state and local governments. The federal government doesn’t collect a tax on your home or other personal property. They are also unique to the United States, at least in terms of the government’s reliance on them. In the United States, more than 12% of tax revenue is made up of property taxes. In the average developed country, that percentage is less than half of what it is in the United States.¹

Understanding property tax calculation

Simply put, your property tax bill is calculated by dividing your property tax rate (sometimes referred to as the mill rate) by the assessed value of your home. For example, if your home is valued at $500,000 and you have a property tax rate of 1%. Your annual property tax bill would be $5,000.

Your property tax rate applies not only to the value of your home itself, but to all real property, which includes your home, the land, and any other structures or buildings on the land.

Factors influencing property tax rates

Property tax rates vary significantly from city to city and state to state. For example, Hawaii has an effective tax rate of just 0.31%, while New Jersey, the most expensive state for property taxes, has an effective rate of 2.21%.¹

Property tax revenue is used to fund a variety of government programs and services. Each local government sets its property tax rate to fund these items.

One reason for the wide discrepancies in property tax rates from state to state and city to city is each location’s reliance on property taxes. For example, some states have higher income taxes and, therefore, rely less on property taxes to fund their programs. On the other hand, some states have no income taxes at all, and so they must rely more on property taxes.

Another factor that affects property taxes is how much the local government, often a municipality, invests in certain programs. Property tax dollars are often used to fund the local schools. A school district that invests heavily and has excellent schools may also have higher property tax rates.

For that reason, high property taxes aren’t necessarily a bad thing. If you are comparing two cities and deciding which to live in, you might use property taxes as a factor. However, in addition to comparing the property tax rates, it’s also worth comparing the quality of the services the local government provides. There could be reasons why property taxes are higher in one area than in another.

Finally, the property tax rate may be affected by the value of the local property. If a local government has a specific dollar amount it needs to generate in property taxes — say it’s $1 million — the lower the value of the property in the area, the higher the tax rate will be to achieve the necessary revenue.

Paying your property taxes

The frequency with which you pay property taxes depends on where you live. Some local governments collect property taxes annually in one lump sum. Other local governments may require payment of property taxes more often, such as biannually or quarterly.

Many homeowners pay a portion of this tax monthly with their mortgage payments. The money is held in an escrow account, and then the escrow company pays the bill when it’s due.

Addressing tax rates

Your property tax rate is based on your local government’s tax assessment of your property. Governments often reassess homes each year and adjust property tax bills accordingly. If your home value goes up, then your property tax bill likely does as well.

Depending on where you live, you may have the option to appeal an assessment you disagree with. The process for appealing your assessment and the deadline by which you must appeal it will differ depending on where you live. Of course, an appeal is no guarantee that you’ll be able to lower your property tax bill, but it may be worth it if you feel strongly that your assessment is  incorrect.

Consequences of unpaid property taxes

Failing to pay your property taxes on time could have major consequences.² First, when your property tax bill becomes delinquent, the local government can place a lien on your home. If you still don’t pay, the lien gives your local government the right to foreclose on your home.

You don’t necessarily have to worry about being foreclosed upon immediately after missing your property tax bill. In most cases, the taxing authority can’t sell your home until one to three years have passed. Additionally, depending upon your state of residence, you may have the right to redeem the home, meaning pay the necessary funds to repurchase your home after it's been sold to someone else, for a period of time after the foreclosure sale.

Another thing that could happen if you fail to pay your property taxes is that your mortgage lender could foreclose on the home. Many mortgage contracts have a clause that requires you to stay up-to-date on your property taxes and allows the lender to foreclose if you don’t.

Property tax vs. real estate tax

A common question that arises about property taxes is the difference between those and real estate taxes. If you’re a homeowner, for example, which tax should you expect to pay?

A property tax is a broad category of tax that could apply to any property you own. For example, depending on where you live, you could pay property taxes on your home, your car, equipment, or other property. Real estate taxes, on the other hand, apply only to real estate, such as your home or any commercial property you may own.

Real estate taxes are one type of property tax, but not all property taxes are real estate taxes.

Tax deductibility

A key similarity between real estate taxes and other property taxes is the ability to deduct them on your federal tax return if you itemize your tax deductions under the state and local tax deduction (SALT).³ This deduction applies to:

• State and local taxes or general sales taxes (you can only deduct one)
• State and local real estate taxes
• State and local personal property taxes

The Tax Cuts and Jobs Act (TCJA) made major reforms to the SALT deduction. Before the TCJA, there was no limit to the amount someone could claim with the SALT deduction. If you paid $25,000 in property taxes for the year, you could deduct $25,000 in property taxes. However, the TCJA placed a limit of $10,000 on the SALT deduction (or $5,000 for those married filing separately).⁴