What Is Property Tax?
Property tax is what you pay every year to fund local services — schools, roads, fire, police — based on your property's value. The formula is simple: assessed value × mill rate. Assessed value is often lower than market value (e.g., 80–90% in many counties). Typical rates run 0.5–2.5% of assessed value, so a $250,000 property might pay $2,500–$6,250/year. It's a major operating expense that directly reduces your NOI and cash flow. You can often appeal if the assessment is too high.
Property tax is the annual tax levied by local governments (county, city, school district) on real estate, based on the property's assessed value and the local tax rate (mill rate).
At a Glance
- What it is: Annual tax on real estate based on assessed value and local mill rate
- Why it matters: One of the largest operating expenses — typically 15–25% of gross rent
- Typical rate: 0.5–2.5% of assessed value, varying by state and locality
- Deductible: Yes — fully deductible on Schedule E for rental properties
- Reassessment triggers: Purchase, major renovation, or periodic county reassessment cycles
Annual Property Tax = Assessed Value × Mill Rate
How It Works
Assessed value vs market value. The county assessor assigns an assessed value to your property. It's often a percentage of market value — 80%, 90%, or 100% depending on the jurisdiction. In some areas, assessed value is capped or increases slowly (e.g., California's Prop 13). When you buy, the county may reassess at the purchase price, which can cause a sharp jump in taxes.
Mill rate (millage). The tax rate is expressed in "mills" — one mill = $1 of tax per $1,000 of assessed value. A 20-mill rate on a $200,000 assessed value means $4,000/year in property tax. Mill rates vary by locality: rural areas often have lower rates; cities and strong school districts can be higher.
How to calculate. Annual property tax = (assessed value / 1,000) × mill rate. Or: assessed value × (mill rate / 1,000). Example: $180,000 assessed value, 25 mills → $180,000 × 0.025 = $4,500/year.
Tax appeals. If you believe the assessed value is too high, you can appeal. Deadlines are strict — often 30–90 days after the assessment notice. You'll need comparable sales or an appraisal to support a lower value. In many counties, 30–40% of appeals result in a reduction.
Real-World Example
David: Duplex in Indianapolis reassessed after purchase.
David bought a duplex in Indianapolis for $195,000. The previous owner had owned it for 20 years; the assessed value was $98,000 and property tax was $2,450/year. After the sale, the county reassessed at the purchase price: $195,000. At the same mill rate (~25 mills), David's property tax jumped to $4,875/year — a $2,425 increase.
His gross rent was $2,200/month ($26,400/year). The tax increase alone ate about 9% of his gross income. He appealed, arguing that comparable duplexes in the neighborhood had sold for $175,000–$185,000. The county reduced the assessment to $182,000, cutting his tax to $4,550/year — still higher than the previous owner, but a meaningful savings.
Pros & Cons
- Predictable — you know the bill in advance and can budget for it
- Fully deductible on Schedule E, reducing your taxable rental income
- Appeals process exists in most jurisdictions; successful appeals can save hundreds or thousands per year
- Can jump sharply after purchase or renovation when the county reassesses
- Varies widely by location — high-tax states (NJ, IL, TX in some areas) can make marginal deals unworkable
- Homestead exemptions usually don't apply to investment properties — you pay the full rate
Watch Out
- Reassessment at purchase: Many counties automatically reassess when a deed is recorded. Factor the post-purchase tax into your NOI model before you buy.
- Renovation triggers: Major improvements can trigger a reassessment. A $50,000 kitchen and bath remodel might add $50,000 to your assessed value — and $1,250/year in tax at 25 mills.
- Escrow surprises: If your lender escrows taxes, a reassessment can increase your monthly payment mid-year. Check the escrow analysis annually.
Ask an Investor
The Takeaway
Property tax is unavoidable and material. Always use the post-purchase assessed value (or a conservative estimate) in your deal analysis — not the seller's current bill. Build an appeal into your first-year plan if you're buying in a county that reassesses at sale. It's one of the few operating expenses you can sometimes negotiate down.