Property Tax

Property taxes are the ongoing real estate cost that varies most dramatically by geography and has the largest impact on total cost of ownership over a multi-decade holding period. A $3 million home in New Jersey — with an effective property tax rate around 2.2% — carries annual property taxes of approximately $66,000. The same home in Hawaii, with an effective rate around 0.28%, carries annual taxes of roughly $8,400. Over 20 years, that difference compounds to over $1 million in cumulative tax payments, before any consideration of interest or investment opportunity cost.

State-level variation is the starting point. New Jersey, Illinois, Connecticut, and New York have the highest effective property tax rates in the nation, regularly exceeding 1.5–2.5%. Hawaii, Alabama, Colorado, and Nevada have some of the lowest effective rates, typically below 0.5%. California is a special case: Proposition 13 limits annual assessment increases to 2% as long as the property isn’t sold, which means long-time owners pay taxes on assessed values far below market — while new buyers at current prices pay full freight at a rate of approximately 1.1–1.3%.

Local jurisdiction rates layer on top of state structure. Within New York state, Westchester County has among the highest effective property tax rates in the country, averaging 1.8–2.4% on market value. New York City proper has rates that appear lower (approximately 0.9–1.2%) but applies them to assessed values set at a fraction of market value for most property classes. Understanding the actual calculation methodology in a target jurisdiction — not just the headline rate — is essential for accurate cost modeling.

Homestead exemptions, senior exemptions, and other abatement programs can meaningfully reduce property tax liability in qualifying situations. These are worth researching jurisdiction by jurisdiction before purchase. The interaction between property tax, mortgage interest deductibility, and the SALT deduction cap is covered in deductions. The full ownership cost picture lives in the Real Estate pillar.