How the Tax Value of Property is Calculated

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Whether you’re a homeowner or a potential homebuyer, the process of calculating the tax value of a property may seem obscure. Real estate taxes can feel additionally confusing when you see your home’s assessed value on a tax bill, and it doesn’t match your home’s current market value.

However, in most states, this process is based on a common equation.

In this post, we explain the essentials of how property taxes are calculated, who levies them, and how they can affect your real estate goals. We’ll also give you a list of the states with the highest and lowest property taxes.

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Editor’s note: The information in this post is meant to be used as a helpful guide for educational purposes. HomeLight always encourages you to reach out to your own tax advisor.

Who charges property taxes and why?

Property taxes are typically administered at the local government level, with each state imposing specific limits on how local jurisdictions may tax property and what those tax revenues can be used for. Your property can be subject to taxes by multiple jurisdictions, such as cities, counties, and school districts.

  • Cities: Municipal governments levy property taxes to fund local services like police and fire departments, road maintenance, public parks, and libraries. These taxes are essential for maintaining the quality of life and infrastructure within the city limits.
  • Counties: County governments also impose property taxes to support county-wide services such as county roads, public health departments, and sheriff’s departments. These taxes are necessary for the broader regional services that benefit multiple cities and unincorporated areas within the county.
  • School districts: Property taxes are a primary funding source for local school districts. These taxes ensure that schools have the resources needed for educational programs, facilities maintenance, and teacher salaries. Quality education systems are vital for community development and property value stability.

Property taxes vs. real estate taxes: These terms are often used interchangeably. In tax terminology, property taxes are typically referred to as “real property taxes.” This means the taxes are levied on the land and any structures attached to it that contribute to the property’s overall value.

How do property taxes impact homebuyers and sellers?

Property taxes directly influence both homebuyers and sellers in several ways.

“Tax value is an important piece of the affordability of a home,” explains Sam Mansour, a top-rated real estate agent in Washington with more than 20 years of experience. “Oftentimes, when people ask what their mortgage payment is going to be, mortgage officers and other professionals in the industry exclude tax and insurance. Those are two extremely important items in creating or figuring out affordability.”

Mansour provides this example: “If you are purchasing a $500,000 home and your payment is going to be $3,500  — or $3,500 without taxes and insurance — adding taxes and insurance may add up to $700 to the monthly payment.”

For sellers, Mansour says property taxes can affect your home’s marketability. Higher taxes may deter potential buyers, impacting how quickly your home sells.

Which states have the highest property tax?

According to a 2024 WalletHub report, here are the 10 states with the highest real estate property tax rates. Their data includes the District of Columbia, so national rankings are from 51 (the highest) to 1 (the lowest).

States with the highest real estate property tax rates

Rank State Tax rate Median home value Tax on median home
51 New Jersey 2.33% $401,400 $9,345
50 Illinois 2.11% $239,100 $5,055
49 Connecticut 2.00% $323,700 $6,484
48 New Hampshire 1.89% $337,100 $6,372
47 Vermont 1.78% $272,400 $4,859
46 New York 1.64% $384,100 $6,303
45 Texas 1.63% $238,000 $3,872
44 Wisconsin 1.59% $231,400 $3,670
43 Nebraska 1.54% $205,600 $3,167
42 Iowa 1.49% $181,600 $2,703

Source: WalletHub; based on effective real-estate tax rates; (*annual median estimates)

Which states have the lowest property tax?

Here are the 10 states with the lowest real estate property tax rates. This list presents 12 states in order to include those that are tied in their ranking positions.

States with the Lowest real estate property tax rates

Rank State Tax rate Median home value Tax on median home
1 Hawaii 0.27% $764,800 $2,054
2 Alabama 0.39% $179,400 $701
3 Colorado 0.49% $465,900 $2,278
4 Nevada 0.50% $373,800 $1,884
5 South Carolina 0.53% $216,200 $1,138
6 Delaware 0.55% $305,200 $1,674
6 Louisiana 0.55% $198,300 $1,087
6 Utah 0.55% $408,500 $2,241
6 West Virginia 0.55% $145,800 $809
10 District of Columbia 0.56% $705,000 $3,957
10 Arizona 0.56% $321,400 $1,786
10 Idaho 0.56% $331,600 $1,872

Source: WalletHub; based on effective real-estate tax rates; (*annual median estimates)

What is your state’s real estate tax ranking?

Use the interactive map below to see how your state ranks for real estate taxes. There are no states without property tax.

Source: WalletHub

Mansour says the tax assessment process and rates of increase vary by state. For example, his home state of Washington handles tax bills differently from other states.

“The assessed value in Washington state is assessed and reassessed each and every year. So, each county assessor is responsible for reporting the assessed value of each property once a year, and then the [property owner] will receive that assessed value and will pay taxes based on that.”

As Washington homeowners face inflation and other affordability issues, the Washington property tax process is creating additional headwinds.

“The assessed values in recent years have been going up and up and up and up,” Mansour explains. “So, if somebody purchased a home for $300,000 ten years ago and their assessed value was $3,000 a year, and that property is now worth $1.2 million, then their assessed value is close to $13,000 a year.”

Property value vs. assessed value

Property value refers to the market value of your home, or the amount it would likely sell for under normal market conditions. The assessed value is the value determined by the tax assessor for calculating property taxes, usually a percentage of the market value.

“The assessed value for 2024 is based on the value of 2023,” Mansour explains. “That’s why a lot of times when we look at our assessed value, it is usually lower than the market value because they’re looking backward, and the economy in the market is going upward. However, sometimes the opposite is true. For example, in [the housing crisis of] 2008, 9, or 10 — I was a Realtor then — the market value went down while the assessed value was higher than the market value.”

How are property taxes calculated?

The formula for calculating property taxes typically involves multiplying the assessed value by the mill rate or mill levy. A mill levy is a tax rate expressed in mills per dollar of assessed value, where one mill is equal to one-tenth of a cent, or $1 per $1,000 of assessed value.

The assessed value estimates the market value for your home, based on local real estate market conditions. To determine the assessed value, the assessor considers several factors:

  • Comparable sales: What similar properties are selling for under current market conditions.
  • Replacement costs: How much it would cost to replace the property.
  • Maintenance costs: The ongoing costs to maintain the property.
  • Improvements: Any enhancements or renovations completed on the property.
  • Income: Any income generated from the property.
  • Interest charges: The interest that would be charged to purchase or construct a comparable property.

We’ll provide some examples of how a mill levy equation looks in a moment. But first, here is a closer look at the different methods an assessor might use to estimate the market value of your property.

Methods used to estimate property tax value

Assessors can estimate the market value of a property using three methods. They may choose one method or a combination of the three:

  1. Sales evaluation method: This method looks at the sale prices of comparable properties in the area. The assessor reviews recent sales data to determine what similar properties have sold for, making adjustments for differences between the properties.
  2. Cost method: This method estimates the cost to replace the property with a similar one at current prices. It includes the cost of materials, labor, and other expenses related to constructing a new, comparable property, minus depreciation for the age and condition of the existing property.
  3. Income method: This method is used primarily for income-generating properties like rental homes or commercial buildings. It estimates the value based on the income the property generates. The assessor calculates potential income, subtracts operating expenses, and applies a capitalization rate to determine the property’s value.

Property tax value examples

Let’s consider some examples to illustrate how property taxes are calculated.

Suppose you own a home with a market value of $300,000. If the local mill rate is 7, using the calculation formula, your property’s tax bill would be $2,100. This means that for every $1,000 of assessed value, you owe $7 in property taxes.

If the local mill rate was 10, you would own $10 in tax for every $1,000 of your home’s assessed value, or $3,000.

In short, “1 mill” is equal to $1 in real estate property tax, which is typically levied per $1,000 of your property’s taxable value. You can check your home’s deed to learn the mill rate for your area or contact your local tax assessor’s office.

Origin note: The term “mill rate” is sometimes referred to as “millage rate,” which comes from the Latin word millēsimum, which means “for the thousandth time” or a “thousandth part.”

Property tax calculators

To get a better idea of the average cost of property taxes in your state and county, many local governments have created online property tax calculators, such as this Michigan example and this Anoka County, Minnesota example.

In addition, you can find numerous online property tax calculators that allow you to select your state or county, such as the SmartAsset or Zillow property tax calculators.

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Tax value of property FAQs

Bottom line: Knowing the tax value of a property

As a homeowner, it’s wise to stay informed about your local property tax regulations and seek professional advice if needed to ensure you’re making the most of your property investment.

If you’re buying or selling a home, knowing how real estate taxes are calculated and what factors influence a property’s assessed value can help you anticipate your tax obligations and budget accordingly.

Whether you’re buying, selling, or just looking at the market, HomeLight can connect you with a top-rated real estate agent in your area.

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