What is property tax and how is it used?

The true cost of home ownership is about more than the home’s purchase price. There are also continuing costs, like insurance, maintenance, utilities and property taxes. 

How much you have to pay in property taxes depends on a variety of factors, including the property’s value, location and tax exemptions. Here’s what you need to know about how property taxes work, how they’re calculated and how to pay them. Plus, learn about taxes on personal property that’s not real estate.

Key takeaways

• Property taxes are typically levied on real estate—including land, homes and other buildings—and personal property like cars, boats and machinery. 
• Property owners are generally responsible for paying property taxes.
• Property tax may be levied at the state and local level. And each state and municipality has its own laws and rules about how taxes are calculated, how they’re used and what exemptions are available. 
• Property taxes typically fund local services like public schools, libraries, emergency services and road maintenance.

In simple terms, property taxes are charged on real estate and certain kinds of personal property. Property owners are responsible for paying property taxes. State and local governments levy property taxes based on things like applicable tax rates and the value of the property, which means they can change from year to year.

You might hear the terms “property tax” and “real estate tax” used interchangeably. But real estate tax is actually just one kind of property tax that’s paid on things like land, homes and other buildings. And personal property tax is another kind of property tax. 

What is personal property tax?

Some states and municipalities levy personal property tax on things other than real estate. That typically includes things like vehicles, boats, machinery and some other valuable items.

The personal property tax rate may differ from the real estate tax rate. And like the real estate tax rate, the personal property tax rate can change year by year. Plus, what kind of personal property qualifies for the tax varies too. 

What is a special assessment tax?

Special assessment taxes are used to fund urgent infrastructure improvements that benefit the area where the taxed property is located. 

For example, a city might levy a special assessment tax on real estate in a neighborhood where they plan to do road maintenance. The funds from the special assessment tax will then fund that maintenance. 

Like regular property tax, special assessment tax is based on the value of the property that’s being taxed. So people whose homes are worth more will pay more in special assessment tax. 

Homeowners associations (HOAs) may also use special assessments—beyond HOA fees—to fund projects. But those assessments aren’t technically the same thing as a special assessment tax.

State governments typically establish a legal framework for how property taxes work in that state. But local governments can still generally make decisions about how property taxes are calculated and paid.

To get an exact idea of how much property tax you’ll owe, check the state and local tax codes for the current tax year. 

But a simple way to estimate how much property tax you might owe is to use this formula: assessed value of the property multiplied by the applicable tax rate. 

There are typically two ways to talk about property value: assessed value and fair market value. Fair market value comes into play when selling a home and deciding how much a home is worth. It’s the price a buyer and seller agree to under normal market conditions. 

Both types of valuation are important to know about, but for property tax purposes, assessed value is what matters. 

Assessed value and property tax

The assessed value of a piece of property is determined by a local tax assessor. The tax assessor may look at a variety of factors during property tax assessment, including market value, local tax exemptions and whether the owner generates income from the property. And exactly how assessed value is calculated varies by locality.

Local governments use property tax revenue to fund public services, which might include things like: 

• Public schools
• Public libraries
• Road maintenance
• Emergency services 

Each municipality allocates tax revenue differently, so the exact way property taxes are used varies.

How you pay property taxes varies by state and municipality. So to know what options are available to you, make sure to check with your local tax authority. 

But no matter where you’re paying taxes, it’s important to make sure you’re keeping track of your tax bills and paying on time. Not paying property taxes can have serious consequences, including late fees and having a tax lien placed on the property.

Here’s some information about a few common ways that property taxes may be paid. 

Pay property taxes in installments

Some property owners may be allowed to pay their property tax bill in installments. That way, the bill can be paid off in smaller installments spaced throughout the year instead of all at once. 

Installment plan options vary by location. Some municipalities might also charge interest on the unpaid portion of your property tax bill, which might incentivize a property owner to pay their property taxes off faster. 

Use a mortgage escrow account

Property tax payments on a home are often folded into an escrow account. The mortgage lender will divide the estimated property tax by 12 and add that amount to monthly mortgage payments. Then, the property tax amount is put in an escrow account and sent to the tax authority. 

Pay property tax online

Some states and municipalities offer online payment options. But before entering any personally identifiable information online, make sure you’re using the official government website. It’s important to know how to spot and avoid scams so you can protect your identity and your money. 

And if paying online isn’t your preference, there also might be an option to mail in a check or pay in person.

Property tax exemptions can reduce the amount someone owes in property taxes. What exemptions are available—and who can qualify for them—varies by state and locality. But there are some possible examples of property tax exemptions that it can help to know about:

• Homestead exemption: These exemptions reduce the taxable value of the home, which then lowers the owner’s property tax bill. To qualify, the property owner has to use the home as their primary residence. And they may have to meet additional requirements, like having low income, being a senior citizen, having a disability, or being a veteran or spouse of a veteran.
• Senior citizen exemption: Some states offer property tax exemptions for people above a certain age—often over 65—who meet certain eligibility requirements. 
• Military exemption: Veterans and active service members may qualify for property tax exemptions. There may be additional requirements for this exemption, too.
• Disability exemption: Property owners with disabilities may qualify for a property tax exemption. 

Remember, these are just some common types of property tax exemptions. Each state and municipality has their own rules about what exemptions they offer and who qualifies.

Some property taxes are deductible on federal tax returns, but only if you choose to itemize your deductions. 

There’s also a cap on how much you can deduct. Individuals can deduct a combined total of $10,000 in state and local income tax, sales tax and property tax. And married people filing separately are limited to $5,000. Those limits are in place through the 2025 tax year. 

Special assessment taxes and HOA fees generally aren’t tax deductible. 

When buying a home, it’s important to factor in all the continuing costs of home ownership. And property taxes are a big one to consider. 

That way, you can get a more well-rounded idea of how much house you can afford. Plus, it’s helpful to know about personal property taxes on things like cars so you can factor that into your budget too.