Question: I know that when you buy a home, you have to pay property taxes, but I don’t really understand how they work. Who decides how much I owe, and how do I budget for this?
Answer: From saving for a down payment to calculating closing costs, there are a lot of costs to consider when you’re buying a new home. All too often, one important line item gets ignored: property taxes.
And we get it — kitchen countertops are a lot more fun to think about. But property taxes are a major part of the homeownership puzzle. Depending on where you live, they can add thousands of dollars to your annual housing costs. Here’s a rundown on all the basics to help you make smarter decisions.
What Are Property Taxes, Anyway?
Property taxes are what you pay to your local government each year — usually your city, county, or township. That money helps fund essential public services like schools, roads, libraries, fire departments, and trash collection.
The amount you owe is based on the assessed value of your home. The higher the value of your property, the more you’ll pay. Think of it like your membership fee for living in your town.
How Much Do I Have to Pay?
It depends. Property tax rates vary a lot depending on where you live. In Alabama, for example, a home worth about $300,000 will cost you $1,148 in property taxes. In New Jersey, however, that same home will cost you $6,770 in property taxes. The higher the value of the home, the more you’ll owe. On average, American households spend $2,969 per year on property taxes, according to the most recent Census report.
Why does this matter so much? Because property taxes aren’t optional — once you become a homeowner, they’re part of your monthly housing budget. That’s why when you’re estimating how much house you can afford, you should always include property taxes in the calculation. (We like this NerdWallet affordability calculator because it lets you plug in estimated taxes and insurance.)
Can Property Taxes Change?
Yes — and they often do.
Local governments reassess property values on a regular basis. That could be annually, or every few years, depending on where you live. If your home’s value increases (which often happens after renovations or rising real estate prices), your taxes will probably go up. Even if your home’s value stays the same, the tax rate itself can change — your local government sets that based on its budget needs.
Because of this, you should build some cushion into your housing budget. If you’re already stretched thin, a sudden tax increase could push you into uncomfortable territory.
How Do I Plan Ahead?
For starters, run your own numbers. Don’t rely solely on the bank’s preapproval. Lenders look at your income and the debt you’re carrying, but they don’t know what you spend on groceries, daycare, or your dog’s monthly meds. Make sure you factor in property taxes, homeowners insurance, utilities, and maintenance when assessing affordability.
You may want to “play house” financially before buying. Essentially, you set aside your full estimated monthly cost (mortgage + property taxes + insurance) in a separate account every month. See how it feels. Are you still able to cover your bills, save for retirement, and enjoy life? If not, you may want to look at lower-cost homes.
What If I Think My Property Taxes Are Out Of Whack?
You can typically appeal. This means going through a process called “grieving” your property taxes. You contact your local town or municipality, gather evidence on comparable homes to show that your taxes are abnormally high, and fill out the required forms. If you don’t want to do this yourself (it can be time consuming) you can often hire an attorney who specializes in property tax abatements. They’re often paid a small upfront fee plus a percentage of whatever money they save you over the first few years.
The Bottom Line
Property taxes are more than just a footnote in your homeownership journey — they’re a significant cost that can impact your monthly budget, closing costs, and long-term financial plan. But they’re not something to be afraid of — as long as you plan ahead, ask smart questions, and leave a little room in your budget for fluctuations.And remember: Your property tax dollars support the schools, streets, and services that make your community a great place to live.
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