What is property tax?
Property tax is a tax your local government charges on the assessed value of real estate. It pays for schools, roads and local services, it is usually billed once or twice a year, and on a rental it is deductible against your rental income.
In a little more detail
Two numbers decide the bill: the assessed value, which the local assessor puts on the property, and the rate, which the county, the city and the school district set between them. Assessed value is not the same as market value, and in some states it can only rise by a capped percentage each year for as long as the property stays in the same hands.
That cap is why a sale matters so much. A property held by the same owner for years can be assessed well below what you just paid, and the reassessment after closing can raise the bill sharply. Budget from what the tax will be after the sale, not from what the seller was paying.
A large improvement can trigger a reassessment too. Adding a unit, finishing a basement or pulling a permit for a major renovation can all put the property back in front of the assessor.
If you believe the assessment is too high, most places let you appeal within a short window after the notice goes out. The appeal is about the assessed value rather than the rate, and it usually needs comparable sales to stand up.
- You buy a duplex for $420,000 from an owner who held it for twenty years and was paying $3,100 a year in tax.
- The county reassesses it at the sale price and the bill becomes $5,400. That difference is $192 a month, which is the gap between the cash flow you modelled and the one you actually get.
Things to watch
- Budget from the reassessed amount after a sale, not from the seller's old bill.
- Diarize the appeal deadline. It is short and it does not move.
- If your lender escrows the tax, your monthly payment changes when the bill does.
Record it as a Property Tax Payment transaction against the property. It then appears in the Income & Expense (P&L) report with the rest of that property's costs, which is what you need at tax time.
The ROI Calculator takes the purchase price, the rent and the running costs, tax included, and shows the return.
This is a plain-English explanation, not legal advice. Rules vary by state and city, so check your local law or talk to an attorney before you act on it.
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