Property Tax: Definition, What It's Used for, and How It's Calculated

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Samantha (Sam) Silberstein, CFP®, CSLP®, EA, is an experienced financial consultant. She has a demonstrated history of working in both institutional and retail environments, from broker-dealers to RIAs. She is a current CFA level 3 candidate and also has her FINRA Series 7 and 63 licenses. Throughout her career, Samantha has used her expertise and various licenses and certifications to provide in-depth advice about household and business-specific financial planning, investing, credit cards, debt, student loans, taxes, retirement, and income strategies.

Vikki Velasquez is a researcher and writer who has managed, coordinated, and directed various community and nonprofit organizations. She has conducted in-depth research on social and economic issues and has also revised and edited educational materials for the Greater Richmond area.

What Is Property Tax?

A property tax is an annual or semiannual charge levied by a local government and paid by the owners of real estate within its jurisdiction. Property tax is an ad-valorem tax, meaning the amount owed is a percentage of the assessed value of the real estate.

Property tax receipts are the main source of revenue for most local governments in the U.S. They are used to fund schools, police and fire departments, road construction and repair, libraries, water and sewer departments, and other local services that benefit the community.

In common usage, property tax refers to a tax on immovable possessions like structures or land. Some local jurisdictions also assess property taxes on moveable property such as vehicles and industrial equipment.

Key Takeaways

• Property tax is based on the assessed value of the property, which can be real estate or tangible personal possessions.
• Property tax revenue is the primary source of funding for local services in the U.S.
• Property tax rates vary widely in cities and towns throughout the U.S.

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Understanding Property Tax

Property tax is paid by individuals or legal entities, such as corporations, that own real estate. A tax is assessed on an individual's primary residence, second home, rental property, and other real estate they may own, such as commercial property. Property tax is not assessed to renters in homes, apartments, or condos.

It is characterized as a regressive tax. That is, the same rate of taxation is applied regardless of the taxpayer's income. The burden falls disproportionately on lower-income taxpayers.

The tax is usually based on the value of the owned property, including land and structures. Many jurisdictions also tax tangible personal property, such as cars and boats. Property tax rates and the types of properties taxed vary by jurisdiction.

In most Organization for Economic Co-operation and Development (OECD) countries, immovable property tax represents a low proportion of federal revenue when compared to income taxes and value-added taxes.

The average rate in the United States is substantially higher than in many European countries. Many empiricists and pundits have called for an increase in property tax rates in developed economies. They argue that the predictability and market-correcting character of the tax encourage stability.

Hawaii!

The state with the lowest effective real estate tax rate i the U.S., at 0.29%. Alabama and Colorado round up the list of lowest rates.

Calculating Property Tax

The amount owners owe in property tax is determined by multiplying the property tax rate by the current market value of the property. Most taxing authorities recalculate the tax rate annually.

Almost all property taxes are levied on real property, which is legally defined and classified by the state. Real property generally includes land, structures, and other fixed buildings.

Ultimately, property owners are subject to the rates determined by the municipal government. The municipality appoints or elects a tax assessor who evaluates local property and calculates property taxes based on current fair market values. This value becomes the assessed value of the home.

In almost all local property tax codes, the owner has the right to formally contest the rate assessed. When property taxes are unpaid, the taxing authority may assign a lien against the property.

Property Tax vs. Real Estate Tax

People often use the terms property tax and real estate tax interchangeably. In fact, not all property taxes are real estate taxes.

Many jurisdictions also levy property taxes against tangible personal property. According to a report by the Tax Foundation, 43 states tax tangible personal property.

Both types of property can be deducted from federal taxes. However, since the Tax Cuts and Jobs Act of 2017, the deduction has been capped at $10,000 per year for married couples and single taxpayers.

So here's the difference: Real estate taxes are taxes on real property only; property taxes can include both real property and tangible personal property.

Why Are Property Taxes So High in the U.S.?

According to the Lincoln Institute of Land Policy, four key factors explain why property taxes are relatively high in the U.S. and why they vary so greatly by state: property tax reliance, home values, local spending, and classification.

What Cities Have the Highest Property Taxes?

According to a 2023 study by SmartAsset.com, the following cities had the highest tax rates as a percentage of assessed value:

• Rockford, Illinois: 3.04%
• Waterbury, Connecticut: 2.75%
• Bridgeport, Connecticut: 2.67%
• Aurora, Illinois: 2.53%
• Elgin, Illinois: 2.53%

What States Have the Highest Property Taxes?

According to SmartAsset.com, Connecticut, New York, and Illinois have the highest property tax rates in the nation when calculated as a percentage of the home's value. Real estate taxes averaged 3% of home values in all three states.

The Bottom Line

Property tax is defined by the Tax Foundation as the tax that is imposed on immovable property like land and buildings, as well as on movable property, like vehicles and equipment.

Property tax is the single largest source of state and local revenue in the U.S. The capital is used to fund schools, roads, police, and other services. Property tax rates vary greatly among states and localities.

1. Cornell Law School, Legal Information Institute. "Property Tax."
2. Tax Foundation. "Glossary: Regressive Tax."
3. Organisation for Economic Co-operation and Development. "Tax on Property," Select "Highlighted Countries: United States" and Select "Background: Euro Area."
4. TodaysHomeowner.com. "2023 Property Tax Rates by State - Highest and Lowest."
5. Cornell Law School, Legal Information Institute. "26 CFR § 1.856-10 - Definition of Real Property."
6. Tax Foundation. "Glossary: Property Tax."
7. Tax Foundation. "States Should Continue to Reform Taxes on Tangible Personal Property."
8. Internal Revenue Service. "With New SALT Limit, IRS Explains Tax Treatment of State and Local Tax Refunds."
9. Lincoln Institute of Land Policy. "50-State Property Tax Comparison Study."
10. SmartAsset.com. "Where Real Estate Taxes Are Highest - 2023 Study."
11. SmartAsset.com. "Where Real Estate Taxes Are Highest - 2023 Study."

An ad valorem tax is a tax derived from an assessed value, such as the value real estate or personal property, with a tax rate applied.

Many state and local governments tax tangible personal property such as cars and boats in addition to real property such as homes and land. Rates vary by locality.

The mill rate is the amount of tax payable per dollar of a property's value. Learn more about how mill rate is determined and how it is used to assess property taxes.

A widow(er)'s exemption is one of several forms of state or federal tax relief available to a surviving spouse in the period following their spouse's death.

The phrase taxation without representation describes a situation when a population is required by law to pay taxes without receiving government representation in return.

A tax lien certificate is a claim against property that has had a lien placed upon it as a result of unpaid property taxes. Certificates are typically sold at auction.

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