Buying a home involves more than just the mortgage and down payment. One of the most important ongoing expenses to understand is property tax. These taxes help fund local services like schools, police and fire departments, public parks, and infrastructure, but they can also vary widely depending on location and property value. Knowing how property taxes work—and what you are signing up for—can help you avoid surprises and make better decisions before closing on your new home.
What Are Property Taxes?
Property taxes are annual taxes levied by local governments based on the assessed value of a property. These taxes are used to support community services and are calculated by multiplying the property’s assessed value by the local tax rate, also known as the mill rate. The result is your yearly property tax bill.
Each city, county, or municipality sets its own rates and assessment methods, which means two homes with similar market values in different areas can have very different property tax bills.
How Are Property Values Assessed?
The assessed value of a property is determined by a local tax assessor. This is not always the same as the market value or the price you pay for the home. Assessments can be based on recent sales of similar properties, the cost to rebuild the home, or a standardized formula used by the local government.
Assessments are typically updated annually or every few years, depending on your location. In areas with rapidly rising home values, assessed values can increase quickly—raising your tax bill even if you do not make improvements to the home.
What Buyers Need to Ask
Before you close on a home, it is important to ask about the current property tax amount and when the property was last assessed. Check whether the property has any exemptions, such as those for veterans, seniors, or primary residences, which could reduce your tax liability.
It is also wise to find out if a reassessment is likely after purchase. In some areas, property taxes are recalculated based on the most recent sale price. If the previous owner had owned the home for many years, the taxes you pay could be significantly higher.
Ask your real estate agent or lender to provide an estimate of your monthly property tax payment. If your mortgage includes an escrow account, property taxes will be collected as part of your monthly payment.
Budgeting for the Future
Property taxes can change over time due to reassessments or increases in local tax rates. When budgeting for a home, consider potential increases and how they could affect your affordability. Also keep in mind that new construction homes or major renovations may trigger a reassessment.
Final Thoughts
Property taxes are a major part of homeownership costs, and understanding them is essential to making an informed purchase. By knowing how assessments work, asking the right questions, and preparing for future changes, you can better manage your financial planning and avoid unwelcome surprises. Make property taxes part of your due diligence and ensure the home you love is one you can comfortably afford.
