Understanding Property Taxes

Property taxes are an ongoing cost of homeownership that many first-time buyers underestimate. Unlike a fixed mortgage payment, property taxes can change over time and vary significantly depending on location.

How property taxes are calculated

Local governments typically calculate property tax by multiplying a property's assessed value by a local tax rate, often called a mill rate or millage rate. Assessed value is not always the same as market value; some jurisdictions reassess regularly, while others do so less frequently or use different formulas.

Why taxes vary so much by location

Tax rates are set locally and fund services such as schools, roads, and emergency services, so rates can differ significantly between neighboring towns or counties. A home with a similar price in two different areas can have very different property tax bills.

Why taxes can change after purchase

In many areas, a change in ownership can trigger a reassessment, meaning the property tax bill after a sale may differ from what the previous owner paid. Some jurisdictions also have rules limiting how much assessed value can increase annually, which can create a noticeable jump when a home changes hands.

How property taxes are typically paid

Many lenders require property taxes to be collected as part of the monthly mortgage payment through an escrow account, with the lender paying the tax bill on the buyer's behalf when due. Other buyers, particularly those without an escrow requirement, pay property taxes directly to the local government on a set schedule.

Researching taxes before buying

Before making an offer, it helps to look up a property's current tax bill and recent history, and to ask the local assessor's office how a sale might affect the assessment. Real estate listings often show tax history, but confirming with the local assessor gives more accurate, current information.

Budgeting for property taxes

Because property taxes are an ongoing cost, they should be included in an overall affordability calculation alongside principal, interest, insurance, and any HOA fees. A home that seems affordable based on price alone might strain a budget once property taxes are factored in.

Common mistakes

A common mistake is assuming the property tax amount shown in a listing will remain the same after purchase, without checking whether a reassessment is likely to occur.

Planning ahead

Understanding how property taxes work, and researching the specific figures for a property being considered, helps a buyer build a realistic monthly budget and avoid surprises after moving in.