The Importance of Property Taxes in Real Estate Transactions

3 October 2025

When buying or selling a property, one crucial aspect that often flies under the radar is property taxes. Whether you're a first-time homebuyer, an investor, or a seasoned real estate professional, understanding how property taxes work can save you from unexpected financial surprises. But why exactly do property taxes matter so much in real estate transactions? Let’s break it down.

What Are Property Taxes?

Property taxes are local government levies imposed on real estate properties. These taxes help fund essential services like schools, roads, emergency services, and public infrastructure. The amount you pay depends on the value of your property and the tax rate set by your local municipality.

In simple terms, think of property taxes as your membership fee for living in a community—helping to maintain everything from streetlights to public parks.

How Property Taxes Impact Real Estate Transactions

1. Affecting Home Affordability

When calculating home affordability, too many buyers focus solely on the mortgage payment, forgetting that property taxes are a significant recurring expense. A home with high property taxes can stretch a budget to its limit just as much as a higher mortgage rate.

For example, a home priced at $300,000 with an annual property tax of $8,000 versus one with a $3,000 tax can make a substantial difference in monthly expenses.

> If you're a homebuyer, always factor property taxes into your total housing cost to avoid biting off more than you can chew.

2. Influencing Property Value

Believe it or not, property taxes can influence a home's value. Buyers might hesitate to purchase a home in an area with increasing tax rates, causing property values to stagnate or even decline. Conversely, well-maintained neighborhoods with reasonable tax rates tend to attract more buyers, boosting demand and home prices.

3. Determining Investment Viability

For real estate investors, property taxes can make or break a deal. A rental property with high taxes may shrink profit margins, while one with lower taxes can provide a better return on investment.

> Before jumping on an investment opportunity, always research local tax rates, historical trends, and potential increases.

4. Impacting Mortgage Approval

Mortgage lenders factor property taxes into your debt-to-income ratio (DTI) when determining loan eligibility. A higher tax bill means higher monthly housing costs, which can lower your borrowing capacity.

If an area has steep taxes, you may qualify for a smaller loan amount than expected, forcing you to adjust your home search criteria.

Understanding How Property Taxes Are Calculated

Property taxes aren’t just a random number. They're based on:

1. Property Assessment – The local tax assessor evaluates the property’s market value based on recent sales, improvements, and neighborhood conditions.
2. Tax Rate (Millage Rate) – This is the percentage applied to your assessed value, set by local governments to fund public services.

For instance, if your home is valued at $250,000 and the local tax rate is 2%, your annual property tax would be $5,000.

Who Pays Property Taxes in a Real Estate Transaction?

Before Closing: Seller's Responsibility

Up until the closing date, the seller is responsible for covering property taxes. If you've owned the home for half the year, you're on the hook for half of the annual tax bill.

At Closing: Tax Prorations

Since buyers take over tax responsibilities at closing, property taxes are often prorated—meaning sellers reimburse buyers for prepaid taxes, and unpaid amounts are adjusted at closing.

After Closing: Buyer’s Responsibility

Once the deal is sealed, the buyer assumes full responsibility for future tax payments. These can be paid directly to the local tax authority or included in an escrow account with your mortgage lender.

Common Property Tax Pitfalls to Avoid

1. Ignoring Upcoming Tax Reassessments

If you’re buying a home that has recently appreciated in value or undergone major renovations, chances are, your property will be reassessed—and your taxes may increase.

> Always check with the local tax assessor to understand potential reassessment schedules and impacts.

2. Underestimating Future Tax Hikes

Some neighborhoods experience steady property tax hikes due to infrastructure projects or school funding needs. A low tax rate today doesn’t guarantee it will stay that way.

> Look into the tax history and trends in the area to predict future costs.

3. Missing Out on Tax Exemptions

Many homeowners qualify for property tax exemptions, such as:

- Homestead exemptions for primary residences
- Senior citizen discounts
- Veteran exemptions
- Green energy incentives

> Check with your local tax office to see if you're eligible for any tax relief programs.

Ways to Reduce Property Taxes

1. Challenge Property Assessments

If you believe your home’s assessment is too high, you can appeal it. Research comparable property values, gather evidence, and present your case to the local tax authority.

2. Keep an Eye on Local Budgets

Attend city council meetings and stay informed about potential tax changes in your community. Public input can sometimes sway tax policy decisions.

3. Invest in Tax-Friendly Locations

If you’re flexible with location, consider moving to areas with lower tax rates. Some states, like Texas and Florida, have no state income tax, making property taxes the primary funding source.

Final Thoughts

Property taxes play a major role in real estate transactions, affecting everything from affordability to investment profitability. Whether you're buying, selling, or investing, being well-informed about tax implications can save you from unwanted surprises.

Want to avoid tax-related headaches? Do your research, ask questions, and always factor taxes into your real estate decisions. After all, a home isn't just about four walls—it's also about the financial responsibilities that come with it.