This article answers these questions and includes ideas to reduce your property taxes.
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Homeownership is a signal of economic stability and success. But the attendant property taxes can be a real source of economic hardship. Here’s a quick guide to saving money on property taxes.
Property tax is a tax paid on the value of a property. The more the value of your home, the higher property taxes you should expect to pay. City, county, and school districts will apply a levy on the assessed value of your property to pay for local public services like education and law enforcement.
Property tax is more than just a tax on homeownership. Many municipalities also tax “tangible property” - cars, boats, and land.
Assessors are responsible for determining the value of your property. They consider the sales value of similar properties in your area, how much it would cost to construct your home, and the potential of a property to be developed.
You can save money on your property taxes in three main ways: take steps to avoid raising the value of your home, ensure an accurate assessment, and file your taxes to maximize exemptions, deductions, and tax credits.
Avoid raising the value of your property by limiting its curb appeal and any substantial improvements to the structure of your home like extra units or extensions.
Make sure the assessor accurately sets your home’s value by checking your property tax card for any discrepancies, walking your property with the assessor, and paying attention to the valuations of your neighbor’s properties.
A final option is to reconsider how you file your taxes. Apply for any exemptions or state/federal tax credits that apply to you. One key example of this is the federal energy incentive, which offers a $500 tax credit against any improvements that make your home more energy efficient. Also, make sure you apply for a full federal tax deduction to avoid paying more taxes than are necessary.
Property tax is a tax paid on the value of property owned by an individual or other legal entity. Most commonly, you’ll have to pay property tax on the value of your home. But property tax also applies to cars, boats, and other “tangible property” in some jurisdictions.
The amount you have to pay in property tax depends on the assessed value of your property and whatever rate local authorities apply. The local government will hire an assessor to determine the value of your home.
You might think that means you’re stuck with whatever property tax your city bills you for. But fortunately, there are some steps you can take to reduce your property tax burden. We’ll cover them in this article.
Property tax and real estate tax are often used interchangeably. You’d be forgiven for thinking they were the same thing. A real estate tax is one type of property tax, but there are other property taxes like the tax on “tangible personal property” - i.e. cars.
A 2019 report from the Tax Foundation indicates that 43 states tax tangible personal property as well as homes.
Both real estate tax and property tax are deductible if you file a Schedule A form with your income tax. The upper limit of your deduction is now $10,000 per year for a couple or single taxpayers as per the Tax Cuts and Jobs Act.
Property tax is calculated based on the assessed value of a property. An assessor then multiplies the assessed value of your property by rates set by local governments and the school board.
Cities, counties, and school districts can all apply a tax on any property you have within their boundaries. The rates applied by each of these bodies are combined into what’s called a “mill rate,” which applies to an entire region.
The mill rate is not measured as a percentage but as several dollars per 1,000 dollars. So a mill rate of 30 mills would mean you paid $30 per $1,000 of assessed property value. This is in effect 3%.
The assessed value of your property may differ from the market value of your property. Most jurisdictions will appoint an assessor who will determine the value of your property and then multiply it by an assessment rate (typically lower than 100%) to find its assessed value.
The process of determining how much you pay will become clearer if we work through an example.
Let’s say your home is located in an area where the school district charges 5 mills, the city charges 10 mills, and your county charges 10 mills. The total mills applied to your property would be 25 mills. That’s $25 per $1,000 of property value or a 2.5% tax.
How did the school district decide to apply a 5-mill levy on properties in your area? The leadership of the school district may have decided they need $2.5 million to fund their operations. They will have divided that $2.5 million budget by the $500 million of the total property value in the district to arrive at a tax of .5% or 5 mills.
The next step is to find out how much you should pay. For this example, your district assesses property values every 5 years and your property was assessed 3 years ago to have a market value of $400,000.
Let’s say your local jurisdiction sets an assessment ratio of 85%. The assessor will multiply your property’s market value of $400,000 by .85 to find its assessed value of $340,000.
Applying the mill levy of 25, your property tax burden for the year comes to $8,500.
An assessor will consider several factors when estimating the value of a property, including access to public utilities such as sewage and water, existing improvements on the property, and the potential of a property to be developed.
One major constraint on an assessor’s work is that they can only gather publicly available information to determine how much your home is worth. Tax assessors normally reassess the value of a property every one to five years.
There are three ways that an assessor can determine the value of your property.
An assessor will generally choose any one of these three methods depending on what information is readily available to them. They may also choose to employ a combination of these approaches to reach a more accurate estimate of a property’s market value.
But market value and assessed value are not the same. The assessor will take the market value and adjust it by the local jurisdiction’s assessment ratio (normally 80 - 95%) to find your home’s assessed value.
Once they have an assessed value, the assessor will send you a notice of the value of your property and then a tax bill.
You can access all the information the assessor used to determine your property’s value via an online portal or by going to a local courthouse. The government may charge you a fee for accessing this information.
You can save money on property taxes by limiting the visible value of your home, walking your home with an assessor, applying for relevant exemptions, and contesting inaccurate assessments.
The value of your home may seem fixed but there’s a lot you can do to influence how much you have to pay in property taxes. Consider the following 11 steps to reduce your property tax bill.
The local government keeps a record of all the information they use to value your property, which is commonly called a “property tax card.” This card has details like the size of your lot, the dimensions of each of the rooms, an itemized list of fixtures, and a list of any improvements you’ve made to the structure.
The first reasonable step in getting to grips with why you’re paying so much in property tax is to ask for your tax card. You can get yours from your municipality, local governing body, or your tax assessor’s office. Sometimes you have to pay a nominal fee.
You should check over the information on the card to find any potential mistakes and notify the assessor if you find any. Assessment mistakes are more common than you might expect given how many homes an assessor will value and the fact that they often use limited or outdated information.
Obvious mistakes should be rectified quickly without the need for a formal process. You might need to launch a proper appeal process if the assessor disputes your complaint.
Most people want to improve their homes. This is a perfectly reasonable impulse and there is a lot of financial upside to increasing the value of your home.
However, from a purely tax-minimising perspective, significant home improvements will increase your property’s value and thus the annual tax you have to pay.
Unintended tax increases are only really a concern if you are significantly changing the structure or appearance of your home. Repainting your bathroom is unlikely to draw the attention of the local government, building a second unit in your garden will.
You have to decide how much a new deck will improve your life and trade that off against the tax implications of making those improvements. From a purely financial perspective, the best course of action is to make renovations shortly before selling a property so you benefit from driving up its price but limit the tax you have to pay.
Call your local tax department to get an accurate estimate of how much a potential improvement will increase your property tax bill.
Curb appeal is a controversial aspect of property valuations. In theory, cosmetic factors like the external appearance of your home shouldn’t affect its assessed value that much. But assessors are human too.
You are likely to get a higher property valuation if your home looks good from the street. This is especially a problem if you put a lot of money into the external appearance of your home but invest less in interior spaces. A well-decorated exterior gives the impression that similar investments have been made inside.
Assessors often notify you before they visit for a property evaluation. Resist the temptation to “clean up” your property in advance. Plan any cosmetic improvements for after the assessment date.
Being a nosey neighbor might help ensure your property is valued properly. Assessors should value your home in the context of the market values of similar homes in the neighborhood.
Assessed values are a matter of public record and you can find use information on similar homes in your neighborhood to find out if you’re being overcharged on taxes. The assessor may have made a mistake if a nearby property with more bedrooms or a larger lot is valued lower than yours.
You can raise this with the local authorities and they may order a reassessment of your home.
Letting an assessor into your home comes with pros and cons. On the plus side, you can identify potential problems in your property that the assessor of which the assessor is likely unaware of. But there’s always a risk they see something that drives up the value of the property.
It all depends on what you have in your home. Inviting the assessor into your property is probably a bad idea if you just got a new marble countertop installed.
Some towns have a policy that an assessor who is denied access to your home must grant it the highest possible valuation for a property of that size, type, and location. Check out local regulations to see if this applies to you and invite the assessor in if it does.
Either way, you should always walk the property with the assessor so you can make sure they see all your property’s deficiencies.
You may think by this point that your local government’s assessment of your property is inaccurate. The local authorities may have also refused to rectify any obvious mistakes in their evaluation. If so, it’s time to formally appeal your property’s assessment.
Filing an appeal will likely cost you a nominal fee as well as legal fees given you should seek appropriate legal representation. Some lawyers will take assessment appeals in exchange for a portion of the savings should your appeal succeed.
You will have to gather robust evidence that your property is overvalued. This evidence could include photos of property damage, the valuations of similar properties, or a third-party valuation of your property.
Make sure you file an appeal within the window specified by your local authority. Otherwise, you’ll be stuck with the tax bill they gave you.
Another risk is that your appeal might result in a higher valuation. This rarely happens but make sure you have a strong case.
Assuming your property valuation is correct, you can also reduce your tax bill by taking advantage of the exemptions and tax credits offered by various government bodies.
One such credit is the federal energy incentive. The federal energy incentive affords you a credit of up to $500 off your property taxes if you make changes to your property that improve its energy efficiency.
You could install more efficient boilers, get solar panels, or even add a small wind turbine to your property to qualify. The credit is unlikely to fully offset the costs of these upgrades so make sure the changes make financial sense independent of the tax credit.
Another path to reducing your property taxes is to apply for any exemptions for which you may be eligible. The following are some common exemptions offered by states and municipalities. Senior exemption: Older citizens may be spared part of their property taxes. The local definition of a senior citizen will vary from jurisdiction to jurisdiction. Veteran exemptions: Veterans often get a discount on property taxes, so check with your local authority if you have served. Exemptions for people with disabilities: You can often get a reduction in property taxes if you have a disability that compromises your ability to earn income. Check with your local authority to see if a disability exemption is available. Exemptions for agricultural properties Homestead exemptions.
Some exemptions will be applied automatically when you receive your tax bill. But, this may not always be the case. Check with your local tax authority to see if you qualify for any further exemptions.
The homestead exemption is a property tax deduction that reduces the assessed value of your primary residence, thus reducing your tax burden. Some version of the homestead exemption exists in most states but the qualifying criteria are meaningfully different depending on where you live.
Some states only extend the homestead exemption to widowed spouses who have lost the breadwinner in their family. Other states extend this exemption to veterans, individuals with a disability, seniors, or law enforcement officers/first responders.
In addition to tax relief, the homestead extension offers you some protection from creditors who may try to claim your house when pursuing debt.
States offer specific tax credits that are designed to alleviate the tax burden for specific individuals or to incentivize certain home improvements. A lot of states offer energy efficiency tax credits in addition to the federal energy incentive, for example.
Look at what tax credits your state offers and see if any fit your property. If not, you may want to consider renovations that would reduce your tax burden. How much these renovations make sense will depend on how long you plan on staying at a property, the size of the tax credit, and how costly property upgrades would be.
Deducting your property taxes will not reduce your property taxes but will reduce your overall tax burden. Under current legislation, you are permitted to deduct up to $10,000 worth of local taxes from your federal tax bill.
One way to maximize your federal tax deduction may be to prepay your property taxes. You may be able to anticipate how many property taxes you will need to pay, especially if your home is assessed every few years.
Some local governments will allow you to pay your property taxes in advance. This a potentially sound strategy if you have not yet paid enough local taxes to maximize your federal tax deduction for the current year.
You can deduct property taxes paid on your residence, vacation home, and other property like cars or land. For the most part, you can only deduct property taxes paid on a property you own. There are some exceptions like taxes paid for home renovations or on the cost of utilities for rented properties.
The property tax deduction applies not only to property taxes on the assessed value of your home but also to any tax you pay in the process of purchasing or selling a property.
You can only claim the property tax deduction if you submit an itemized tax deduction instead of a standard tax deduction. An itemized tax deduction is now capped at $10,000 for individual filers, as part of the Tax Cuts and Jobs Act of 2017. The standard deduction for an individual filer was $12,950 in 2022 and increases with inflation.
Choosing between an itemized tax deduction and the standard tax deduction is a challenging process that depends on your financial situation. The standard deduction will be greater for some homeowners than an itemized deduction so consult a tax advisor.
The math at play here changed with the Tax Cuts and Jobs Act in 2017. The Act capped the deduction of state and local taxes at $10,000 for each filer or couple. You will get a $5,000 maximum state and local taxes deduction each if you file separately as a couple.
The Tax Cuts and Jobs Act also substantially increased the standard tax deduction available. For the 2023 tax year, single filers get $13,850, joint filers get $27,700, and heads of households get $20,800. This number tracks inflation so is also likely to increase.
It might still make sense to file an itemized deduction if you have deductible expenses beyond state and local taxes that take you beyond your standard deduction, including home mortgage interest, charitable donations, and casualty and theft losses.
You need to submit a Schedule A form with your tax filings to secure an itemized deduction. This will require keeping detailed financial records.
The states that have the lowest property taxes are Hawaii (0.31%), Alabama (0.37%), and Louisiana (0.54%).
Saying that one state has a low property tax rate is a little misleading because states don’t set property taxes. Instead, these figures - taken from a 2019 Tax Foundation report - are average tax rates calculated by taking the total property tax paid across a state and dividing it by the total home value.
The ten states with the lowest property taxes in 2019 according to the Tax Foundation are as follows.
The ten states with the highest property taxes in 2019 according to the Tax Foundation are:
We answer the most frequently asked questions about saving money on property taxes below.
If you don’t pay your real estate taxes, the local taxing authority is likely to attach the tax as a lien on your property. A lien is a notice attached to your property that makes it clear a creditor has an unpaid claim against you.
A property tax lien takes priority over all other liens applied to a property, including a lien due to unpaid mortgage payments. This means that the taxing authority has a greater right to resell your property than the mortgage lender and will be paid before the lender out of any money generated from the sale. As a result, mortgage lenders will often pay property taxes and add value to your mortgage debt.
If the lien remains unpaid, the taxing authority has the right to sell your property to recoup the debt. An alternative would be to sell the property tax lien to a third party, who would then have the right to sell your home.
You can pay for your property taxes in one of two ways: by making a direct payment when taxes come due and by establishing an escrow account.
The local taxing authority will bill you quarterly for property taxes. That bill will include instructions on how to pay taxes directly to the taxing authority.
An alternative permitted in many jurisdictions is to pay your property taxes as part of your monthly mortgage payments. In this case, the quarterly bill will be split over the three monthly mortgage payments. The money would be stored in an escrow account from which the taxing authority would withdraw your property taxes quarterly.
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