Real Estate Exam: Property Taxes, Special Assessments, Tax Deductions Explained

Property taxes are calculated by multiplying the assessed value of a property by the local tax rate, called the mill rate or millage rate. A mill equals one-tenth of one cent, so a rate of 50 mills means 50 dollars per 1,000 dollars of assessed value. The county or municipal tax assessor determines the assessed value, which may be a percentage of market value depending on the state. Tax rates are set by local taxing authorities including counties, cities, school districts, and special districts.

Assessed value is the dollar value assigned to a property by a government tax assessor for the purpose of calculating property taxes. Market value is the estimated price the property would bring in an open and competitive sale. Many jurisdictions assess property at a fraction of market value, called the assessment ratio. For example, if a property has a market value of 300,000 dollars and the assessment ratio is 80 percent, the assessed value is 240,000 dollars. The tax is then calculated on the assessed value.

A special assessment is a charge levied against properties that benefit directly from a specific public improvement, such as new sidewalks, street paving, sewer lines, or streetlights. Unlike general property taxes that fund broad public services and are based on assessed value, special assessments are based on the benefit received by each property and fund a specific improvement. They are typically a one-time charge or spread over several years. Special assessments create a lien on the property that must be disclosed to buyers.

When property taxes are not paid, the taxing authority places a tax lien on the property, which takes priority over virtually all other liens including mortgages. If the taxes remain unpaid, the government can sell the property at a tax sale to recover the delinquent taxes. Most states provide a redemption period during which the original owner can reclaim the property by paying the delinquent taxes plus interest and penalties. Tax liens are involuntary, specific liens that represent one of the government's strongest collection tools.

A homestead exemption reduces the taxable assessed value of an owner-occupied primary residence, lowering the property tax bill. The exemption amount and eligibility vary by state. Some states offer a fixed dollar exemption, such as subtracting 50,000 dollars from the assessed value. Others offer a percentage reduction. Many states provide enhanced exemptions for seniors, veterans, disabled persons, and surviving spouses. The homestead exemption typically applies only to the owner's primary residence, not to investment properties or second homes.

Homeowners who itemize deductions on their federal income tax return can deduct property taxes paid on their primary residence and other real property. The Tax Cuts and Jobs Act of 2017 capped the total deduction for state and local taxes, including property taxes and state income or sales taxes, at 10,000 dollars per year for most filers. This cap significantly reduced the benefit for homeowners in high-tax states. Mortgage interest remains separately deductible on loans up to 750,000 dollars for homes purchased after December 2017.

The mill rate is the tax rate used to calculate property taxes, expressed as the amount of tax per 1,000 dollars of assessed value. One mill equals one dollar per 1,000 dollars of assessed value, or one-tenth of one cent per dollar. To calculate the tax, multiply the assessed value by the mill rate and divide by 1,000. For example, a property with an assessed value of 200,000 dollars at a mill rate of 30 yields a tax of 6,000 dollars per year.

An ad valorem tax is a tax based on the assessed value of property, from the Latin phrase meaning "according to value." Property taxes are the most common form of ad valorem tax in real estate. The tax amount increases as the property value increases, making it proportional rather than flat. Ad valorem taxes provide the primary funding mechanism for local governments, school districts, and special taxing districts. They differ from specific taxes, which are fixed amounts regardless of value, and from income taxes, which are based on earnings. ---