What Is Property Tax? How It's Calculated and How to Lower Yours

Property taxes can add thousands to your annual housing costs. Here's how they're calculated and what you can do to reduce your bill.

What Is Property Tax — and Why Do You Have to Pay It?

Property tax is an annual tax assessed by your local government — typically county or municipal — on the value of the real estate you own. It's one of the primary ways local governments fund public schools, fire departments, roads, libraries, and other community services.

Unlike income tax, which is paid to the federal and state governments, property tax goes almost entirely to your local jurisdiction. This is why property tax rates vary dramatically from one zip code to the next — even within the same state, two towns a few miles apart can have very different tax rates based on their funding needs and assessed property values.

Assessed Value vs. Market Value

Understanding property tax starts with understanding that two different values are in play: market value and assessed value, and they're not the same thing.

Market value is what your home would sell for in today's real estate market. It's influenced by recent comparable sales, location, condition, and current demand.

Assessed value is the value your local assessor assigns to your property for tax purposes. Depending on your jurisdiction, assessed value might be equal to market value, or it might be a percentage of it — often 70–100% depending on local law. This percentage is sometimes called the assessment ratio or equalization rate.

Example: If your home has a market value of $350,000 and your jurisdiction assesses properties at 80% of market value, your assessed value is $280,000.

How the Mill Rate Works

Once assessed value is set, your local government applies the mill rate (also called the millage rate) to calculate your tax bill.

One mill = $1 of tax per $1,000 of assessed value.

The formula: Assessed Value ÷ 1,000 × Mill Rate = Annual Property Tax

Example: Assessed value of $280,000, mill rate of 15: $280,000 ÷ 1,000 × 15 = $4,200 per year

Mill rates are set by local governments and can change annually based on budget needs and total taxable property values in the area.

Average Property Tax Rates by State

Property tax rates vary widely across the United States. Some states have very low rates; others are significantly higher.

Low property tax states (effective rates typically under 0.6%): Hawaii, Alabama, Colorado, Louisiana, West Virginia

Mid-range states (effective rates typically 0.6–1.2%): California, Florida, Georgia, Arizona, Tennessee

High property tax states (effective rates typically above 1.5%): New Jersey, Illinois, New Hampshire, Connecticut, Vermont

Keep in mind that effective tax rate (tax bill ÷ home value) is the most useful comparison metric across states, since assessment ratios and mill rates can't be compared directly.

How to Appeal Your Property Tax Assessment

If you believe your home is assessed at more than its fair market value, you have the right to appeal. A successful appeal can reduce your tax bill by hundreds or thousands of dollars annually.

Step 1: Review your assessment notice. Your local assessor sends an annual notice showing your assessed value and the deadline to appeal. Don't miss this deadline — they're strict.

Step 2: Research comparable sales. Pull recent sale prices for homes similar to yours in your neighborhood (same size, age, condition). These are called "comps." Your county assessor's office or local MLS data can help.

Step 3: Calculate what your assessment implies. Divide your assessed value by your jurisdiction's assessment ratio to get the implied market value. If that number is significantly higher than what comparable homes have sold for, you have a case.

Step 4: File a formal appeal. Submit a written appeal to your local Board of Equalization or Assessment Review Board. Include your comps and any evidence that the assessed value is too high (photos of condition issues, formal appraisal, etc.).

Step 5: Attend the hearing. Present your evidence calmly and factually. Many appeals are decided in favor of the homeowner when well-documented comps support the case.

The filing fee, if any, is usually modest ($25–$100). A successful appeal can save you $500–$2,000+ per year.

Property Tax Exemptions That Can Lower Your Bill

Many jurisdictions offer exemptions that reduce the taxable value of your home. Check whether you qualify for any of these:

Homestead exemption: The most common exemption. Available in most states for your primary residence. Can reduce assessed value by $25,000–$50,000 or more, depending on the state. In some states (like Florida and Texas), it's automatic once you register; in others, you must apply.

Senior citizen exemption: Many counties offer reduced assessments or tax freezes for homeowners above a certain age (often 65+) who meet income requirements.

Veteran exemption: Disabled veterans and surviving spouses often qualify for partial or full property tax exemptions, ranging from a few thousand dollars of assessment reduction to full tax exemption depending on disability rating and state law.

Agricultural use exemption: If you use your land for farming or agricultural purposes, many states tax it at agricultural value rather than development value.

Check with your county assessor's office to see which exemptions apply in your area and how to apply. Missing an exemption you qualify for is leaving money on the table every single year.

How Property Taxes Affect Your Mortgage Payment

If you have a mortgage, there's a good chance your property taxes are included in your monthly payment as part of your escrow account.

Here's how it works: your lender collects 1/12 of your estimated annual property tax each month alongside your principal and interest payment. That money goes into an escrow account. When property taxes are due (typically twice a year), your lender pays the bill from the escrow balance.

When your property tax increases — because your assessed value went up, the mill rate increased, or you lost an exemption — your lender will adjust your monthly escrow payment to cover the higher bill. This is why your mortgage payment can creep up even after you've locked in a fixed interest rate.

Review your annual escrow analysis statement carefully. If there's a significant increase, verify it's due to a legitimate change in your assessment or tax rate, not an error.