How property tax is calculated
Property tax is levied by local governments (counties, cities, school districts) based on the assessed value of real estate. The tax bill equals the assessed value multiplied by the local millage rate. One mill equals $1 of tax per $1,000 of assessed value.
Assessed value vs market value
In most states, assessed value is a percentage of market value — sometimes 100%, sometimes much less. California's Proposition 13 caps assessed value increases at 2% per year until the property sells, which is why long-time owners pay far less than new buyers on identical homes.
States with the highest and lowest property tax
- Highest: New Jersey (2.49%), New Hampshire (2.18%), Connecticut (2.15%), Illinois (2.23%).
- Lowest: Hawaii (0.31%), Alabama (0.41%), Colorado (0.51%), Utah (0.67%).
Property tax funds local schools, fire departments, roads, and libraries. That's why high-property-tax states often have highly-rated public schools — the two are directly linked.
Frequently asked questions
Why are property taxes so high in New Jersey?
New Jersey has the highest average property tax in the US at 2.49% of home value. This is driven by high local government spending (especially on schools — NJ has over 600 school districts for 9 million residents), lack of other local revenue sources, and high property values.
What is a homestead exemption?
A homestead exemption reduces the taxable value of your primary residence. Florida, for example, exempts $50,000 of assessed value for permanent residents, plus caps annual assessment increases at 3%. Some states also offer enhanced exemptions for seniors, veterans, and disabled residents.
How often are properties reassessed?
It varies by state and even by county. Some states reassess annually (California effectively caps increases at 2%/year until sale). Others reassess every 3-10 years. Reassessment triggers can include sale, major renovation, or new construction.
Can I deduct property tax on my federal return?
Yes, but with limitations. The SALT deduction (State and Local Taxes) caps total deductions for property tax plus state income tax at $10,000 per return (married filing jointly or single). For high-tax states, this cap significantly limits the benefit.
What is Proposition 13?
California's Prop 13 (1978) caps property tax at 1% of assessed value, with annual assessment increases limited to 2% until the property is sold. Long-time owners pay far less than new buyers on identical homes — a $500,000 home bought in 1990 might have a $250,000 assessed value today.
What happens if I don't pay property tax?
Unpaid property tax eventually results in a tax lien on the property. After a redemption period (1-3 years depending on state), the property can be sold at a tax sale to recover the owed taxes. You could lose your home over unpaid property tax.
Are property taxes deductible for landlords?
Yes — rental property taxes are fully deductible as a business expense on Schedule E, with no $10,000 SALT cap. This is one reason investors often have lower effective property tax burdens than owner-occupants.
Glossary of key terms
- Millage Rate
- Property tax rate expressed in mills (1 mill = $1 per $1,000 of assessed value). A 25-mill rate on a $200,000 home produces $5,000 in annual tax.
- Assessed Value
- The value a tax assessor assigns to your property for tax purposes. May be a percentage of market value or capped by law.
- Homestead Exemption
- A reduction in taxable value for owner-occupied primary residences. Varies by state and may include additional reductions for seniors/veterans.
- Tax Lien
- A legal claim against a property for unpaid property taxes. Can eventually lead to a tax sale and loss of the property.
- SALT Deduction
- State And Local Tax deduction on federal returns. Capped at $10,000 since 2018 — covers property tax plus state income tax (or state sales tax).
Common mistakes to avoid
- Not appealing assessments — studies show 30-60% of appealed assessments result in reductions
- Assuming assessed value equals market value — they often diverge, especially in non-reassessment years
- Forgetting about SALT cap when planning tax strategy — high-tax-state residents lose significant deduction
- Not applying for homestead or senior exemptions you qualify for
- Miscalculating monthly escrow payments — property tax increases can cause escrow shortages
Pro tips
- Appeal your assessment every 3-5 years — most appeals succeed, and savings compound annually.
- Check for exemptions you may qualify for: homestead, senior, veteran, disability, agricultural. Many homeowners leave money on the table.
- If buying a home, research the property tax history — a home in a non-reassessment state may have artificially low taxes that reset on sale.
- Investors: property taxes are fully deductible on rental properties (no SALT cap), making rentals more tax-efficient than owner-occupied homes in high-tax states.
- Consider property tax when choosing where to retire — moving from New Jersey (2.49%) to Alabama (0.41%) on a $400,000 home saves $8,320/year.
Results are estimates for educational purposes only and not financial advice. Consult a licensed professional for advice specific to your situation.