How Real Estate Property Taxes Work

Real Estate Property Tax Assessments

Even vacant lots, like the ones surrounding this brownstone in New York City, are assessed by property tax assessors.
Even vacant lots, like the ones surrounding this brownstone in New York City, are assessed by property tax assessors.
Dmitri Kessel/Time Life Pictures/Getty Images

In the United States, local governments use the revenue from real estate property taxes to fund public services, such as fire protection, law enforcement, roadwork and schools. Without property taxes, local governments would have a difficult time funding these services; property tax revenue accounts for "about half of the revenue raised by local governments" in the United States [source: Britannica].

Taxable property includes any real estate that is not owned by a government, such as houses and companies with brick-and-mortar places of business.

Religious organizations, like churches, are usually not taxable. A tax assessor still assesses the value of government and exempt church real estate, however.

Just as a country has borders and a city has limits, property is divided into assessment areas or assessment units. An assessment area might be a city, a county or even a school district. A property tax assessment is the market value of a property. A tax assessor -- an elected or appointed official -- assesses the value of every taxable property in that assessment area.

It would be a lot of work for the assessor to visit every property in an area. Luckily for everyone, the process is much simpler. Assessments are made by comparing the market value of similar properties. For example, if Mr. MacDonald sells his farm at a price close to his asking price, the tax assessor can use that sale price as a basis for the property tax assessments of farms similar to Mr. MacDonald's.

Every local government has its own real estate property tax procedures.

Generally, to set or adjust a tax rate, local governments must look at how much money comes from various sources of revenue, including sales tax and state aid. This amount is compared to the government's budget for the year. The amount of money needed to fill the gap between the budget and the expected revenue is usually called the tax levy.

For example, the Rose City government has a $6 million budget and receives $3.5 million in sales tax revenue and state aid. Rose City needs to raise $2.5 million in property taxes to cover the budget.

$6,000,000 - $3,500,000 = $2,500,000

The fundamental idea of the modern property tax is to provide revenue for public services. It follows, then, that real estate property tax rates vary widely across the United States according to the needs of individual local governments. One city uses property tax revenue to repair roads riddled with pot-holes, while another city uses the revenue to hire more police officers to fight a gang problem.

Usually, real estate property tax rates don't change much over time. Governments are more likely to change the rate at which properties are assessed, called the assessment rate or assessment level. Learn what other factors can change a real estate property tax bill on the next page.