How property tax is calculated
Property tax is simple at its core: your property's taxable value (its assessed value minus any exemptions, like a homestead exemption) multiplied by the local tax rate. Lenders usually collect one-twelfth of the annual amount each month in escrow, so the monthly figure matters for budgeting a rental's cash flow.
- Taxable value = property value − exemptions.
- Annual property tax = taxable value × tax rate.
- Monthly = annual ÷ 12.
Worked example
A property valued at $400,000 with a 1.1% effective rate and no exemption owes $400,000 × 1.1% = $4,400 per year, or about $366.67 per month. Add a $50,000 exemption and the taxable value drops to $350,000, cutting the bill to $3,850.
Property tax and your rental's numbers
For investors, property tax is one of the largest operating expenses — and it's fully deductible against rental income. Fold the monthly figure into your cash-on-cash return, and remember that at sale, your gain (net of costs) is taxed via capital gains and depreciation recapture.
Frequently asked questions
How is property tax calculated?
Taxable value (assessed value − exemptions) × the local tax rate. Divide by 12 for the monthly escrow amount.
What's a typical property tax rate?
Effective rates vary widely by state and county — commonly around 0.3% to over 2% of value per year.
Is property tax deductible on a rental?
Yes — it's a deductible operating expense that lowers your taxable rental income.
Related calculators
- Cash-on-Cash Return Calculator — fold property tax into your return.
- Capital Gains Tax Calculator — tax when you sell.
- Rental Property Depreciation Calculator — your yearly deduction.