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What Are Real Estate Taxes?

Learn the basics of property taxes and what you need to know at tax time.

[Updated: Feb 04, 2021] Aug 30, 2019 by Matt Frankel, CFP
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Real estate property taxes are assessed annually for owners of real property throughout the United States. Although the exact use of the funds collected can vary considerably from location to location, they are generally used to provide at least some of the funding for state and local governments, as well as institutions such as public schools, roads, and other publicly available infrastructure.

With that in mind, the cost of property taxes can vary dramatically based on your location, and real estate property taxes are just one potential tax you may have to pay. Here’s a rundown of how real estate property taxes vary throughout the U.S., what other taxes you may have to pay depending on where you live, and whether you might be able to deduct your real estate taxes on your next tax return.

How much are real estate property taxes?

According to a study using data from the U.S. Census Bureau, the average homeowner in the United States pays about 1.18% of their home’s value each year in real estate property taxes. However, that doesn’t tell the whole story.

There’s a big variety in tax rates among the states, and there’s also some variation within each state, which I’ll discuss in the next section.

The 5 states with the highest real estate taxes

In the states with the highest real estate taxes, homeowners pay significantly more than the national average. In the case of New Jersey, the state with the highest real estate taxes in the country, the average homeowner pays more than double the average property tax rate nationwide.

With that in mind, here are the five states with the highest real estate property taxes:

Rank State Average Tax Rate (% of Home Value)
1 New Jersey 2.44%
2 Illinois 2.31%
3 New Hampshire 2.20%
4 Connecticut 2.07%
5 Wisconsin 1.94%

Data source: U.S. census bureau data.

What makes property taxes so expensive in these states? Several high-tax states have underfunded pension costs and rely on property taxes to make up the shortfall. Others (especially the northeastern states), meanwhile, spend an above-average amount of money on public education. For all of them, though, there are state-specific reasons that contribute to their higher tax bills, as well as to general trends. For example:

  • New Jersey has a fragmented government, which leads to cost inefficiencies. For example, New Jersey has 600 school districts, while many other states only have a small fraction of that amount.
  • Illinois real estate prices have grown at a slower rate than that of the national average, so tax increases have been necessary to keep up with rising government expenses.
  • New Hampshire and Connecticut derive a relatively large percentage of their state and local revenue from real estate taxes when compared with most other states.
  • Wisconsin has a relatively large government and isn’t allowed to charge lower taxes to owner-occupants than they do investors, something many other states are allowed to do (more on that shortly).

The 5 states with the lowest real estate taxes

On the other end of the spectrum, there are some states where real estate property taxes are relatively low when compared with those of the rest of the U.S.

Rank State Average Tax Rate (% of Home Value)
47 (tie) Washington D.C. 0.55%
47 (tie) Colorado 0.55%
49 Louisiana 0.52%
50 Alabama 0.42%
51 Hawaii 0.27%

Data source: U.S. census bureau data

Here’s what this means. If you have a $300,000 home in New Jersey, you can expect to pay about $7,320 in annual property taxes. A home of the same value in Alabama would have a tax bill of about $1,260. That’s a big difference.

As I alluded to earlier, it’s also important to mention that many states allow for different property tax rates for owner-occupants and investors. This is especially true in states where the average homeowner pays a below-average percentage of their home’s value toward real estate taxes.

For example, where I live in South Carolina, real estate property taxes are well below the national average, but that refers to owner-occupants. My 2018 real estate tax bill translated to roughly 0.7% of my home’s value -- significantly less than the average U.S. homeowner’s tax rate. One of the ways that South Carolina keeps property taxes so low is that there’s a big increase for investors. As a South Carolina rental property owner, I can tell you firsthand that the real estate property taxes on my rentals are about four times what an owner-occupant would pay on the same property.

Property taxes can vary significantly within each state

It’s also worth mentioning that real estate property taxes can vary dramatically within each state. This is because property taxes are generally used to help fund local governments in addition to paying for expenses that affect the entire state. Just to name a few examples, there’s a line item on my real estate tax bill that shows how some of the amount is allocated toward our local zoo, while some goes to the community college that serves my local area.

Just to give you an idea of how real estate property taxes could be used, here’s a screenshot of my 2018 tax bill, which shows a breakdown of how my tax dollars are allocated. As I mentioned, the use of real estate taxes varies by location, but here are some common areas where tax dollars are often spent:

Richland County tax form

Click to enlarge

High property taxes don’t necessarily mean high overall taxes in an area

Another important point is that just because real estate taxes are high in a certain state or locality doesn’t necessarily mean that it’s a "high-tax" area. Conversely, the absence of high real estate taxes doesn’t automatically mean that a place is tax friendly.

Real estate property taxes are just one piece of the overall tax picture in a state or local area. Some also assess property tax on vehicles, while others don’t, for example. And, this can be rather expensive in some cases. I mentioned that I live in a state with relatively low real estate taxes, but between my wife and I, we paid nearly as much in car taxes last year as we did in real estate property taxes. It’s not that we own particularly fancy vehicles -- our state just has relatively high vehicle taxes. If I consider the combined car and real estate taxes, it’s safe to say that we pay more than many homeowners in states with higher real estate taxes, but no vehicle property taxes.

Alternatively, some states with high property taxes may have relatively low sales taxes, or little or no state income taxes. Some may tax things like Social Security benefits, while others have numerous tax exemptions for retirees. The point is that it’s important to consider all of the potential taxes you have to pay in a certain area.

Are real estate property taxes deductible on your tax return?

Here’s one real estate tax topic that has changed considerably in recent years. While real estate property taxes are still deductible on your federal tax return, the Tax Cuts and Jobs Act limited the deduction in a way that disproportionately affects people in high-tax states.

Starting with the 2018 tax year, the deduction for state and local taxes (also known as the SALT deduction) is limited to $10,000 per year, per return. This includes your property taxes as well as your state income or sales taxes paid each year. If you’re in a high-tax state, the income tax portion alone can easily eat up the entire $10,000 limit.

What’s more, the standard deduction was roughly doubled. For 2019, it is now $12,200 for single taxpayers and married couples filing separately, $24,400 for married taxpayers filing a joint return, and $18,350 for heads of household. So, unless you have enough itemizable deductions in addition to the $10,000 maximum SALT deduction to push your total over the applicable standard deduction, it isn’t worthwhile to use the SALT deduction at all.

The bottom line is that while the deduction for real estate property taxes still exists, the vast majority of U.S. taxpayers aren’t able to benefit from it.

Property taxes (and the laws involving them) change over time

As a final thought, it’s important to emphasize that the information discussed here can change over time. Your property taxes will generally adjust with market conditions as well as state and local expenses each year. Just because you live in a low-tax state now doesn’t necessarily mean that your state will remain low-tax in the future, and the same can be said for high-tax states. And just because the SALT deduction recently changed doesn’t mean the new one will remain forever. The point is that this is a snapshot of U.S. property taxes and their tax treatment in 2019, and the information is likely to evolve over time.

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