Here’s How Property Taxes Work — And How to Budget for Increases

Although homeownership comes with all sorts of benefits, there are some notably unsexy parts, too. A big one? Paying property taxes. Collected by local governments, this money helps fund public services and amenities, such as road maintenance, schools, trails, parks, and fire departments. In other words, property taxes help communities function.

But for homeowners, they can be a real sore spot. Setting aside political differences about the role of government in society, property taxes are challenging because they can and do fluctuate — and, typically, they increase over time. (By one estimate, property taxes in the United States increased by an average of 19 percent between 2016 and 2021.) This means homeowners may suddenly find themselves needing to fork over more money than they were expecting. The unpredictability of property tax increases can make it difficult to plan ahead.

“Revenue gained from property taxes is typically used to fund local projects and services that benefit homeowners, but setting aside extra money every month to cover the additional cost can be a challenge,” says Brandon Snow, executive director at Ally Home. “Even after you pay off a mortgage, you’ll still have to pay property taxes for as long as you live in your home.” 

For help, I turned to real estate finance experts for their tips and advice on how best to manage property tax increases. Here’s what they had to say.

To wrap your head around increases, you first need to understand the general gist of how property taxes are calculated. The general formula is this: property value (as determined by a local government assessor) multiplied by the tax rate (determined by government taxing entities and voters). 

So, when home values go up, property taxes also increase. They can also jump when a local government adds or expands public services and thus needs to increase the tax rate to generate more funding. (You might remember seeing something like this on the ballot.)

You can get a rough idea of how much your property value is increasing over time by signing up for data aggregation tools like Homebot, Zillow, and Redfin, says Nicole Rueth, a lender with Movement Mortgage. These figures likely won’t be an exact match for the value your local assessor comes up with, but they can get you in the ballpark.

“They are not perfect, but are a gauge,” she says. “Save a little extra for taxes based on the percentage you see your home value going up.”

One of the easiest ways to make yourself more resilient against future property tax increases is something you’re probably already doing: Let your lender or mortgage servicer pay your property taxes on your behalf.

This strategy can help cushion the blow of an increase because it spreads out your annual property taxes over 12 months. 

Your monthly “mortgage” payment is actually a few different payments all rolled together: principal and interest, private mortgage insurance (if you have it), property taxes, and, often, homeowners insurance. You pay a fixed amount each month and your lender stashes some of that money away in an escrow account, then uses it to pay your taxes whenever they are due (which is typically once or twice a year). 

The alternative would be you making one or two large, lump sum payments directly to your local government. For a lot of people, paying hundreds — or even thousands — of dollars twice a year is a lot more challenging than paying a little bit each month. 

However, if you’re a personal finance superstar, then you may want to consider paying your property taxes directly to your local government yourself, says Snow. Rather than paying a little to go toward your property taxes to your lender each month, you could instead invest that money and hope that it grows. 

“This could allow you to optimize your cash returns by putting the lump-sum amount aside in a high-rate savings account and earning interest on it before taking it out to make your tax payments,” he says.

Even if you don’t go this route, a high-yield savings account can still be a handy, low-risk way to grow your money and hedge against future property tax increases, Snow says.

Although you can’t know for sure exactly how much your property taxes will increase in the future, you can set aside some amount of extra money in a general house-related savings account to help soften the blow. This is also just a generally good strategy for budgeting for home maintenance, emergency repairs, new appliances, home renovations, and whatever else may come up over the course of owning a home.

You can use your home’s appreciation during the most recent property tax assessment period as a general guide to your savings, with the understanding that the next increase may be bigger or smaller.

“That is certainly not an exact science, but intentionally keeps you aware of upcoming adjustments,” says Rueth.

Set up automatic transfers into a savings account every pay period or every month so that you don’t even have to think about it. Automating the process can also help ensure you actually stick to your plan, rather than giving in to temptation and spending that money on something non-essential.

“We’ve seen firsthand how financial automation can help consumers supercharge their savings and manage their money better,” says Snow.

Every local government is different, but they all have some sort of appeals process if you don’t agree with their new valuation of your property. Research these rules in your specific city or county, then see if you might be able to make a good case.

“You as the homeowner can contest the value and have your property tax bill lowered,” says Rueth. “It’s important to know your specific county’s tax process.”

If you are hoping to buy a house soon, you should definitely take future property tax increases into account while determining your budget. But they shouldn’t dissuade you from buying property altogether, says Rueth.

Of course, to help offset property tax increases, you can always adopt one or several of the tried-and-true methods of saving more money, such as picking up a second job, getting a roommate, cutting out unnecessary expenses, lowering your utility bills, and more.

“(Property tax increases) are a direct result of the incredible growth in equity wealth we gained,” she says. “Yes, they have pinched some homeowners’ budgets, but there are options.”