Property Taxes: What They Are and How To Calculate Them

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When you own your own home, you are responsible for paying property taxes. Property taxes are charged by local governments throughout the U.S., and they fund important services (such as education and public safety). The specific amount of property taxes you owe varies based on where you live.

Here's what you need to know about property taxes, how to calculate property tax, and when (and how) you'll make property tax payments.

What Is Property Tax?

What are property taxes? This is a question every American property owner might ask themselves.

Property taxes are charged by local governments on real estate and, in some cases, on other personal property like vehicles. The taxes fund a variety of local government services.

Property owners may pay the taxes directly to the government, or include money for property tax payments in their mortgage payments. Mortgage lenders will collect and keep the money in an escrow account and pay the taxes due by the government's payment deadlines.

What Property Tax Is Used For

Property taxes account for 30% of total state and local tax collections, and for 70% of total local tax collections, according to the Tax Foundation. State and local governments use this source of revenue for:

• Schools
• Police and Fire Departments
• Roads
• Public parks
• Other government services

Your tax rate is affected by where you live and the costs of your school district and local government agencies.

How Property Tax Works

Your state and local governments set property tax rates and establish rules for property tax collection.

Average property taxes usually add up to several thousand dollars, and these taxes are collected annually (often divided into summer and winter taxes). You pay your taxes directly to your local government by the deadline (unless you have a mortgage).

In many cases, mortgage lenders are required to establish and maintain an escrow account to collect funds for property taxes to ensure you pay your property taxes. Otherwise, the government could put a tax lien on the house, which is collateral for the mortgage loan. As a result, mortgage lenders often require you to pay money toward your taxes in an escrow account as part of every monthly mortgage payment.

Based on your tax assessment and your tax rate, lenders calculate the monthly amount you'll have to pay each year in property taxes, divide this amount by 12, and add that amount to each mortgage payment. The money you pay each month toward property taxes is moved into an escrow account until taxes are due.

Regardless of whether you pay your taxes directly to the government or include them in your mortgage payments, the monthly cost of your taxes is included when estimating your qualifying PITI (Principal, Interest, Taxes, and Insurance). Lenders compare your PITI to your income when you apply for a mortgage to verify that your home is affordable.

How To Calculate Property Tax

Each location across the U.S. establishes local property tax rules, including the property tax rate and how taxes are applied. In many areas, the following formula is used:

(assessed value - exemptions) x local tax rate = total property taxes due

The assessed value of the property could be equal to the home's fair market value, but it is often a percentage of it. Local governments set an assessment ratio that determines what percent of a property's fair market value should equal the assessed value. For example, if the assessment ratio is 50% and the home is valued at $400,000, the assessed value would be $200,000.

Exemptions are then subtracted from the assessed value, and the property tax rate is applied to calculate your annual property tax bill.

For example, if your assessed value is $200,000 and there is a $25,000 homestead exemption, you would be taxed on $175,000 in home value. If your property tax rate was an effective 0.90%, your annual tax bill would be $1,575.

Property Tax Exemptions

In some states, there are property tax exemptions that reduce property taxes owed by lowering the assessed value of a property. These exemptions apply to certain qualified individuals with the goal of making homeownership more affordable.

Available exemptions can vary widely by location, but here are some common exemptions found in many parts of the country:

• Homestead exemption: Homestead exemptions reduce property tax bills for primary residences. Homeowners may need to apply for this exemption.
• Senior citizens: Senior citizen property tax exemptions are available in some states for those over 65 to reduce property tax bills and help ensure seniors aren't priced out of their homes.
• Veterans: Some local areas offer a reduction in assessed value or provide other property tax breaks to veterans, and particularly those who are disabled.
• People with disabilities: Persons with disabilities may also enjoy a reduction in assessed value or other opportunities to save on property taxes if they apply and demonstrate an eligible disability.

Are Property Taxes Deductible?

In some cases, homeowners can claim federal tax deductions for part of the expenses of homeownership. This may include claiming a state and local tax deduction (SALT) for property taxes (and state income taxes) paid.

The SALT deduction is available if you itemize your taxes, instead of claiming the standard deduction. There is a cap on the amount you can deduct, which is $40,000 as of 2025 (or $20,000 per person for married couples who file taxes separately). The cap also rises 1% each year beginning in 2026 and increasing through 2029.

The full $40,000 deduction is available to taxpayers making under $500,000, after which it phases down at a 30% rate. For higher-earning taxpayers, the deduction cannot fall below $10,000.

Deductions reduce your income tax, as you do not pay tax on the amount you deduct.

Property Tax FAQs

Still need to know more? Here are the answers to some frequently asked questions about property taxes.

Who Pays Property Taxes?

Property owners are responsible for paying property taxes in states and counties where these taxes are collected. This can include residential and commercial property owners.

Renters generally do not pay property taxes directly, but landlords factor in the costs of these taxes when setting rental rates.

When Are Property Taxes Due?

The due date for property taxes is set by each local area. Local governments sometimes set multiple deadlines, with tax costs increasing for those who pay late.

As mentioned, mortgage lenders may also require that homeowners pay a portion of their property taxes with each mortgage payment. This money is kept in escrow, and the mortgage lender pays the local government on your behalf. Any escrow money left over after all taxes and insurance have been paid are returned to the homeowner annually.

What Happens if You Don't Pay Property Taxes?

If you don't pay property taxes, the local government could put a tax lien on your property. Your property could be seized and sold for nonpayment of taxes.

Final Thoughts: Understanding Property Taxes as a Homeowner

Property taxes are one of the costs you must consider when purchasing a home. Your lender may require you to pay the taxes with each mortgage payment, and the money will be put into an escrow account. Even if you pay the taxes yourself, your tax bill will still be factored in by lenders when they determine how much home you can afford.

To find out more about how your property tax payment can affect your housing costs and mortgage affordability, reach out to Freedom Mortgage today. A qualified loan officer will help you understand the costs of homeownership and prequalify for a loan so you can move forward in your home-buying process.