Property Tax Explained: How It's Assessed and Deducted (2025)

A local tax, not a federal one

Property tax is levied by counties, cities, and school districts — not the IRS — and it funds local services like schools, roads, and emergency services. That is why rates and rules vary enormously from one town to the next. Your federal return only enters the picture when you deduct what you paid.

How your bill is calculated

Two numbers drive your bill: the assessed value of your property (set by a local assessor, often a percentage of market value) and the mill rate or tax rate the jurisdiction applies. Multiply them and you get your annual tax. Exemptions — homestead, senior, veteran — can lower the taxable value.

The federal deduction and the SALT cap

Property tax is deductible on your federal return only if you itemize, and it falls under the state-and-local-tax (SALT) deduction. Per the IRS Topic No. 503, Deductible Taxes, the combined deduction for state and local income (or sales) taxes plus property taxes is capped at $10,000 per year ($5,000 if married filing separately). Many homeowners hit this cap, which is a key reason fewer people itemize now.

Appealing an assessment

If you believe your assessed value is too high, you can usually appeal. Gather comparable sales, check for errors in your property record (wrong square footage, extra bathrooms), and file within your jurisdiction's window. A successful appeal lowers your bill for years, not just once.

Escrow and paying on time

If you have a mortgage, your lender often collects property tax through an escrow account and pays it for you. Review the annual escrow statement — shortfalls raise your monthly payment, and surpluses are refunded.