How property taxes work
Key takeaways
04 · ideas- Property tax = assessed value x mill rate
- Assessed value is often different from market value
- Homestead exemptions can reduce the taxable value
- Most mortgages collect property taxes in monthly escrow
Basic level
The essentials · 1 min
Property taxes are levied by local governments on real property. They are calculated annually and represent a significant ongoing cost of homeownership.
Basic formula:A mill is $1 per $1,000 of assessed value. A mill rate of 15 on a $350,000 assessed value = $5,250/year.
Assessed value vs. market value: Many jurisdictions assess property at a percentage of market value (the assessment ratio). If the assessment ratio is 80% and market value is $400,000, assessed value is $320,000.
Intermediate level
How it applies · 1 min
Rate variation by location
| State | Avg effective rate | Annual tax on $350k home |
|---|---|---|
| New Jersey | ~2.0-2.5% | $7,000-$8,750 |
| Illinois | ~1.7-2.2% | $5,950-$7,700 |
| Texas | ~1.5-2.0% | $5,250-$7,000 |
| California | ~0.7-1.1% | $2,450-$3,850 |
| Hawaii | ~0.2-0.3% | $700-$1,050 |
Homestead exemptions
Many states offer exemptions that reduce assessed value or tax owed for primary residences. Common forms: flat dollar exemption (e.g., $25,000 off assessed value), percentage exemption, and circuit breakers that cap taxes as a percentage of income for fixed-income households.
Escrow
When a mortgage has an escrow account, the lender collects a monthly portion of estimated annual taxes as part of the payment, then pays the tax bill when due. RESPA governs escrow accounts and limits the cushion lenders can require.
Advanced level
The math, step by step · 1 min
Assessment appeals
If a property is assessed above its market value, the owner can typically appeal to a local assessment review board. Evidence required includes comparable sales data, independent appraisals, or documentation of conditions reducing value. Successful appeals can reduce assessed value permanently or until the next reassessment cycle.