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

Property tax is a fee imposed by a government on real estate or tangible personal property.

What Is Property Tax?

Property tax is a recurring fee imposed by a local government and paid by real estate owners within its area. It is an ad-valorem tax, meaning it is calculated based on a percentage of the property’s assessed value.

The main source of revenue for many U.S. local governments comes from property tax payments. These funds are utilized to support essential services like schools, law enforcement, road maintenance, libraries, and other community benefits.

Generally, property tax pertains to taxes on immovable assets such as land and buildings, but some jurisdictions may also levy property taxes on movable assets like vehicles and machinery.

Understanding Property Taxes

Property taxes refer to payments made by individuals or entities, like corporations, who own real estate properties. These taxes are imposed on various types of real estate owned by an individual, including primary residences, second homes, rental properties, and commercial real estate. Renters are not subject to property taxes.

Property taxes are considered regressive taxes, meaning they are applied uniformly regardless of the taxpayer’s income. This results in a disproportionate tax burden on lower-income earners.

Property Tax Basics

The tax is typically calculated based on the value of owned property, which includes both land and structures. Some jurisdictions also levy taxes on tangible personal property, such as vehicles and watercraft. Property tax rates and the types of properties subject to taxation can vary by location.

Global Perspective on Property Tax

In most Organization for Economic Co-operation and Development (OECD) countries, taxes on immovable property contribute a small portion of federal revenue compared to income taxes and value-added taxes.

Regional Contrasts

The average property tax rate in the United States is notably higher than that seen in many European nations.

The Aloha State

Hawaii boasts the lowest effective real estate tax rate in the United States, standing at a mere 0.29%.

Calculating Property Taxes

Property tax amounts are calculated by multiplying the property tax rate by the property’s current market value, with most taxing authorities adjusting the tax rate annually.

The vast majority of property taxes are imposed on real property, which is legally defined and categorized by the state and typically includes land, structures, and other permanent buildings.

Property Tax Assessment Process

Property owners are ultimately bound by the rates set by the municipal government. The municipality designates a tax assessor who is responsible for evaluating local properties and determining property taxes based on the current fair market values. This assessed value then becomes the official value of the property.

Contesting Property Tax Rates

Most local property tax codes provide property owners with the option to officially challenge the assessed rate. Failure to pay property taxes can lead to the taxing authority placing a lien on the property.

Property Tax vs. Real Estate Tax

Many people mistakenly use the terms property tax and real estate tax synonymously, but they are not entirely interchangeable. While real estate taxes specifically target real property, property taxes can encompass tangible personal property as well.

It is worth noting that numerous jurisdictions impose property taxes on tangible personal property. According to a report from The Finance Avenue, 43 states levy taxes on tangible personal property.

Both real estate taxes and property taxes are eligible for deductions on federal taxes. However, following the Tax Cuts and Jobs Act of 2017, the maximum deduction is $10,000 per year for both married couples and single taxpayers.

In summary, real estate taxes solely apply to real property, whereas property taxes can encompass both real property and tangible personal property.

Reasons Behind High Property Taxes in the United States

The Finance Avenue explains that the relatively high property taxes in the U.S. can be attributed to four main factors: property tax reliance, home values, local spending, and classification.

Which Cities Rank the Highest in Property Taxes?

In a recent study conducted in 2023 by The Finance Avenue, it was found that the cities listed below have the highest property tax rates based on a percentage of the assessed value:

Which States Impose the Highest Property Taxes?

The Finance Avenue reports that Connecticut, New York, and Illinois stand out for having the highest property tax rates in the United States, calculated as a percentage of the home’s value. On average, real estate taxes make up 3% of home values in these three states.

The Bottom Line

Property tax is a levy placed on both real estate, such as land and buildings, and personal property, like vehicles and equipment.

In the United States, property tax stands as the primary source of state and local government revenue, financing essential services such as education, infrastructure, law enforcement, and more. Tax rates for property vary significantly across different states and regions.