What is Real Estate Taxes?

Real Estate Taxes: Explained in Plain English

Real estate taxes are annual financial obligations that homeowners pay to their local government or governments.

A homeowner's real estate tax bill is determined by two key factors: the assessed value of the property and the local tax rate.

Property assessments are conducted by local government officials. Assessments are meant to reflect the property's market value. The assessed value of a home is not "what the home would sell for." It is a value used only by the municipal government for taxation purposes.

Some homeowners prefer their assessed value to be as low as possible because lower assessments mean less taxes paid.

The second factor that determines the annual real estate tax bill is the local tax rate, which varies based on specific taxes in the community, such as funding for schools, infrastructure, and public services.

Property taxes are a significant source of revenue for local governments and play a crucial role in funding community services and amenities.

Real Estate Property Tax Rates by State

The following table shows typical property tax rates by state, expressed as a percentage of home value:

Real Estate Taxes: A Real World Example

When a first-time home buyer purchases a home, the closing process often involves collecting several months of real estate taxes in advance as prepaid expenses.

A home buyer may pay up to 14 months of property taxes upfront at closing to ensure they stay current on their tax obligations while providing a buffer of payments toward the next tax cycle. Most mortgage lenders collect 1/12 of the annual tax bill in each monthly mortgage payment.

Tax bills vary based on a property's assessed value and the local tax rate, which can fluctuate depending on municipal needs and budgetary decisions. The tax rate can be as low as 0.5 percent per year and range as high as 3 percent.