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In This Article
While taxes aren't a fun topic to discuss, what is fun is saving money on your taxes.
One type of tax that can dramatically impact your budget as a homeowner or real estate investor — and a tax that you can lower if you know how — are property taxes.
In this article, we’ll discuss:
- why property taxes exist
- ways that property taxes might influence your property-purchasing decision
- specific ways you can lower your property tax
Let’s get started!
What Are Property Taxes?
Simply put, property tax refers to tax paid on the property you own.
In 43 specific states, property tax is calculated by the local government and paid by the property owner.
Property taxes provide local cities and counties a source of revenue, paying for public services such as:
- Local first responders (police/fire/EMS)
- Local government
- Public education
According to USA Today, the average property tax rate is 1.1% of your property’s value. However, property tax rates differ widely between states.
A recent report found that the average American pays $2,471 in property tax each year — but state averages range between $587 (Alabama) and $8,300 (New Jersey).
Highest Property Taxes by State
USA Today reports that the highest property tax rates are found in the following states:
- New Jersey (2.21%)
- Illinois (2.05%)
- New Hampshire (2.03%)
- Vermont (1.8%)
- Wisconsin (1.73%)
Don’t let these numbers fool you, though. States also vary by income tax, sales tax, and other factors that can impact the overall cost of living.
Lowest Property Taxes by State
On the flip side, the lowest property tax rates are found in the following states:
- Hawaii (0.3%)
- Alabama (0.4%)
- Louisiana (0.52%)
- Wyoming (0.55%)
- West Virginia (0.55%)
If your state isn’t listed here, you may be able to find more information about your specific state by checking with your state government’s website.
How Are Property Taxes Calculated?
Property tax depends on the value of the property — both the buildings as well as the land — which is typically assessed every one to five years by an in-person assessor.
Assessors rely on two pieces of data to calculate property tax:
- the Mill Levy
- the assessed property value
We’ll look at each one in-depth next to show you how property taxes are calculated.
The Mill Levy
The Mill Levy (also known as “millage tax”) is the property tax rate levied on your property value.
With the mill levy, one mill represents one-tenth of one cent; for $1,000 of assessed property value, one mill would then be equal to $1.
The actual property tax depends upon the mill rate, which is set locally by the city government, with consideration for:
- emergency services
- school boards
- other beneficiaries of property tax
While you can calculate your own tax rate using an online property tax calculator — just make sure to use a property tax calculator that matches your state, as rates vary — it’s important to know the components of the formula and how to do it on your own.
Assessed Property Value
Assessed value refers to the market value of your home.
There are three basic ways of determining this value:
- Sales Evaluation: What is the value of similar properties in the area?
- Cost Method: What would it cost to replace this property? (The cost method is the most involved method, as it requires assessors to account for depreciation to the property.)
- Income Method: How much income could you make from the property?
Once you have both the mil rate and the assessed property value, you can determine the property tax.
Property tax = (mill rate x taxable property value) ÷ 1,000
For example, if your home is valued at $200,000 and the mill rate was 5, you would owe $100 in property taxes.
5 Ways To Lower Your Property Taxes
There are ways to lower your property taxes — if you know how.
Here are a few ways you can do so.
#1: Check the Records
Homeowners can request their property tax cards from the office of their local assessor.
These cards provide a record of past assessments, so by checking these records, you can note any errors that might warrant a reevaluation — a reevaluation that can potentially lower your property tax bill.
#2: Point Out Flaws
During the assessment process, many property owners leave the assessor to do his or her job.
But this can be a mistake, because the assessor may not see flaws or structural issues that might be hard to find.
Accompany the assessor and point out any flaws or structural issues that might otherwise be missed — this will help you receive a fair valuation of the property and help you avoid overpaying in property taxes.
#3: Keep Your Property Value Low
A new deck.
A second structure.
You may have dreams of additions like these that can increase the value of your home — but keep in mind they will increase your property taxes as well.
It’s important to do the math so that you can know the long-term costs this will add to your property tax bill before you make any changes.
#4: Look for Exemptions
There are property tax exemptions you can take advantage of that can lower your property tax bill — if you qualify.
Those who qualify for an exemption may include:
- Those with disabilities
- Properties that have agriculture components
To learn more about exemptions, we recommend you talk with a local trusted tax authority.
#5: Research Neighboring Properties
Information regarding other home assessments near your property is open and available to the public.
If a neighbor has a very similar house to you — for example, has a pool while you don't — yet pays less in property taxes, it’s worthwhile to speak with an assessor to see if an error was made accessing your property and can be fixed to lower your property taxes.
Property Taxes: The Bottom Line
Before buying a home or an investment property, you’ll need to carefully consider the impact of property taxes on your long-term investment.
In addition, it's important to be proactive and see if you can lower not just your property taxes, but other taxes associated with homeownership or real estate investing.
Here are additional resources to help you do just that:
- Learn how homeowners can save big on their taxes
- Here are 4 proven ways to pay less taxes legally
- Here is a guide to calculate your rental property depreciation
- These are the most effective tax strategies to reduce your taxable income