Understanding Property Taxes & Ways to Reduce Them During Income Tax Preparation
Property taxes are a major ongoing cost of owning real estate. Knowing how they are calculated — and how they may affect your income tax return — can help you manage expenses more effectively.
How Property Taxes Are Calculated
Assessed Value of Property
Local tax assessors determine the value of your property, typically based on comparable sales, land value, and improvements (like a house or building).
This assessed value may be lower or higher than the current market value.
Assessment Ratio
Some areas only tax a percentage of the property’s assessed value (e.g., 80% of assessed value).
Tax Rate (Millage Rate)
Local governments apply a tax rate, often expressed in "mills."
One mill = $1 of tax per $1,000 of assessed value.
Exemptions & Adjustments
Common exemptions include a homestead exemption for a primary residence, or exemptions for seniors, veterans, or disabled individuals.
Final Calculation
PropertyTax = (AssessedValue × AssessmentRatio – Exemptions) × TaxRateProperty Tax = (Assessed Value × Assessment Ratio – Exemptions) × Tax RatePropertyTax = (AssessedValue × AssessmentRatio–Exemptions) × TaxRate
Example:
If your home’s assessed value is $200,000, the assessment ratio is 100%, you qualify for a $25,000 homestead exemption, and the local tax rate is 1.5%:
(200,000 – 25,000) × 0.015 = $2,625 \text{ annual property tax}
Ways to Lower Property Taxes
Review Your Property Tax Assessment
Check your assessment notice each year. Errors in square footage, lot size, or property classification can cause overassessment.
If you find discrepancies, you may appeal the assessment with your local tax authority.
Claim All Eligible Exemptions, Deductions & Credits
Homestead exemptions
Senior citizen or disability exemptions
Veteran exemptions
Agricultural or conservation use exemptions (where applicable)
File an Appeal
Most counties allow property owners to formally challenge their assessment if they believe it is too high.
Supporting documents may include recent appraisals or evidence of lower sale prices of similar homes.
Consider Timing of Improvements
Renovations or additions can increase assessed value. If possible, schedule improvements after the assessment date.
How Property Taxes Affect Income Taxes
Deductibility of Property Taxes
On your federal tax return, property taxes paid on real estate are part of the State and Local Tax (SALT) deduction.
The SALT deduction is capped at $10,000 per year ($5,000 if married filing separately).
Rental or Business Property
If the property is used for business or rental purposes, property taxes are fully deductible as a business expense.
This reduces taxable net income from the property.
Appealing for Tax Savings
Lowering your property tax bill reduces out-of-pocket expenses and may increase deductions available on your tax return.
Key Takeaways
Property taxes are based on assessed value × tax rate, minus exemptions.
Homeowners should review their assessment annually and appeal if necessary.
Exemptions (homestead, senior, veteran, etc.) can provide significant savings.
During tax preparation, property taxes may be deductible, but the SALT cap limits deductions on personal residences.
For rental or business properties, property taxes are fully deductible as business expenses.