A Guide to Property Taxes When Buying a Home

Understanding property taxes is a critical step in the home-buying process, as these ongoing costs significantly impact your annual housing expenses. This guide explains how property taxes work, how they are calculated, and what you can expect when purchasing a home in the United States. Property taxes are levied by local governments to fund essential services like public schools, road maintenance, and emergency services. The amount you pay is not based on your income or the home's purchase price, but on its assessed value. By the end of this article, you will have a clear understanding of this key financial responsibility.

How Are Property Taxes Calculated?

The calculation involves two main components: the assessed value of your property and the local tax rate, often called a millage rate. The assessed value is an estimate of your property's fair market value, determined by a county or municipal assessor. This value is then multiplied by the tax rate, which is set by local taxing authorities like school boards and city councils. For example, if a home has an assessed value of $400,000 and the combined tax rate is 1.5%, the annual property tax would be $6,000. It's important to note that tax rates can vary dramatically even between neighboring towns.

Source: U.S. Census Bureau (2023 Data)

What Should Homebuyers Do Before Closing?

Before finalizing your home purchase, it is essential to research the property tax history and future obligations. Title Insurance, a policy that protects you and your lender from losses related to the property's title history, often includes a review of tax records to uncover any unpaid bills. You should also check if the seller has prepaid any taxes and how you will be credited at closing. Based on our experience assessment, failing to account for a potential property tax increase after the sale is a common oversight.

Are There Exemptions or Deductions Available?

Many states and localities offer property tax exemptions that can reduce your tax burden. Common exemptions are available for primary residences (as opposed to investment properties), senior citizens, veterans, and individuals with disabilities. For example, a "homestead exemption" might shield a portion of your home's value from taxation. Additionally, if you itemize deductions on your federal income tax return, you can generally deduct up to $10,000 ($5,000 if married filing separately) for a combination of state and local property and income taxes.

To effectively manage property taxes, prospective buyers should proactively research local rates, budget for potential increases, and apply for all eligible exemptions after purchase. Understanding this cost ensures there are no surprises and helps you accurately assess the long-term affordability of your new home.