A new homeowner's guide to property taxes

Celebrate a new milestone of closing on your new home and finally reap the benefits of owning new property. Those benefits also bring their own set of responsibilities.

One of those new responsibilities? Property taxes. While they may not be the most exciting aspect of homeownership, it's important for you to understand how property taxes work and what's expected of you and your payments.

Property taxes are paid by property owners and are typically based on a percentage of the property's value. Your city, county, and/or state utilize the funds from property taxes to fund things like public transportation, safety, roads, parks, schools, and more.

Property tax rates may vary based on your county, city, and state. The amount you pay for your property tax is based on what's called your "real property." This includes the land you own, as well as the structure on that land. The frequency of these payments may vary based on your state or local jurisdiction or your situation. Some taxing authorities collect taxes monthly, while others may collect annually or semi-annually.

To estimate what you'll pay for property taxes, you'll need to know the assessed value of your home, the land where it is located, and anything else that might be considered part of your state's real property tax classification. This isn't necessarily the same as the home's appraised value — if you don't already know your property's assessed value, be sure to check with your local tax resources for more information.

From there, you'll need to know your local municipality's mill rate (sometimes called a levy rate), which is the rate for how much property tax you would owe for every $1,000 of your property's value. Once you know these two factors, you can use the following rate to determine your property tax:

            (Mill rate x Assessed value of home) / 1,000 = Property Tax

For example, if your home was assessed at $400,000 and your mill rate is 15, you'd multiply these two values together and divide by 1,000 to get $6,000 as your total property tax value. Keep in mind, some areas also have special assessments, so this formula may not yield the total property tax.

If you're making monthly payments on your mortgage, some lenders may require you to utilize an escrow account. Escrow accounts are a way for your lender to help you manage and consolidate various home-related expenses. When utilized, your monthly payments will go toward your mortgage and interest, while another portion of monthly payments will be set aside and withdrawn by your lender to pay taxes and insurance fees when they are due throughout the year.

Escrow accounts can help you plan for these payments by setting aside the funds ahead of time. You may find it helpful to learn more about escrow accounts.

Keep in mind that changes to your home's value may have a direct effect on your property taxes. For example, if your home is reassessed and its value goes up, this will likely increase what you're paying in property taxes. Your state or local tax rate can also fluctuate temporarily or permanently change. Review your local rates online if you want to anticipate any potential changes.

Additionally, eligible homeowners may be able to deduct property taxes from their income taxes. If you're a veteran, senior, or considered disabled, you may be eligible for property tax deductions or exemptions, depending on your state of residence and after completing the appropriate applications. For more information about whether you'd qualify for a property tax exemption, contact your local department of revenue. Be sure to consult a tax advisor.

Property taxes are just one responsibility you take on as a homeowner — something you get to experience alongside the joy of closing on your new home. If you want to learn more about property taxes, talk with your lender or a tax professional for more information.

Looking for more reading? Learn more about homeownership taxes or explore our entire Learning Center for more articles.