Buying a home in the United States often comes with a surprise: the size of the annual property tax bill. In some areas it exceeds 2% of the home’s value every year and rivals the mortgage payment as a fixed cost. The good news is that property tax is deductible as part of the state and local tax (SALT) itemized deduction, and the 2025 tax law (the OBBBA) raised the SALT cap from $10,000 to $40,000. This article explains how U.S. property tax works, how much it varies by location, how to appeal an assessment, the new SALT cap rules ($40,400 for 2026), and the special treatment of rental property, nonresident owners, and property tax paid on a home in Japan. Figures are as of 2026.
How Property Tax Works: Assessed Value Times Rate, Set Locally
Property tax is not a federal tax. Counties, cities, towns, and school districts levy it, and most of the revenue funds public schools. The bill equals the assessed value multiplied by the local tax rate (often expressed as a mill rate). Assessed values are based on market value, but jurisdictions differ in how often they reassess, what fraction of market value they tax (the assessment ratio), and whether annual increases are capped. In New York City, for example, one- to three-family homes (Class 1) are assessed at 6% of market value, and assessment increases are limited to 6% per year and 20% over five years. Bills are typically paid in one to four installments, and if you have a mortgage, the lender usually collects the tax monthly in an escrow account and pays it on your behalf.
Rates vary by a factor of seven or eight
According to Tax Foundation data for 2022, the effective property tax rate on owner-occupied housing (tax paid as a percentage of market value) is highest in New Jersey at about 2.38%, followed by Illinois (2.32%), New Hampshire (2.15%), and Connecticut (1.98%). The lowest is Hawaii at about 0.28%, then Alabama at 0.43%. Rates also differ sharply between counties and school districts within a state, so always check the actual annual tax before buying. For comparison, Japan’s fixed asset tax has a standard rate of 1.4% (up to 1.7% including city planning tax), but the taxable base for residential land is reduced (to one sixth for small residential lots), so the effective burden is generally far lower than in high-tax U.S. jurisdictions.
Appealing an assessment
If your assessment exceeds those of comparable homes nearby or your recent purchase price, most jurisdictions allow an appeal. In New York City, notices of property value arrive each January, and appeals to the Tax Commission are due by March 15 for Class 1 homes and March 1 for other classes. You will need evidence such as comparable sales or an appraisal. Also check the exemptions available for a primary residence, such as New York’s STAR program, homestead exemptions in many states, and senior or veteran exemptions; most must be applied for and are not automatic.
The SALT Deduction: Cap Raised to $40,000 by the OBBBA
The SALT deduction lets itemizers deduct state and local income taxes (or sales taxes) plus property taxes on their federal return. From 2018 through 2024 the deduction was capped at $10,000. The OBBBA raised the cap to $40,000 for 2025 and $40,400 for 2026, with increases of about 1% per year through 2029. However, the cap is reduced by 30% of the amount by which modified adjusted gross income (MAGI) exceeds $500,000 in 2025 ($505,000 in 2026), but not below $10,000. Married taxpayers filing separately use half of each figure. The expansion is temporary: in 2030 the cap is scheduled to return to $10,000.
| Year | SALT cap (joint and single filers) | MAGI at which the phase-down begins |
|---|---|---|
| 2025 | $40,000 | $500,000 |
| 2026 | $40,400 | $505,000 |
| 2027 to 2029 | Roughly 1% higher each year | Roughly 1% higher each year |
| 2030 and later | $10,000 (no phase-down) | n/a |
You must itemize to use the SALT deduction. With the 2026 standard deduction at $16,100 for single filers and $32,200 for joint filers, itemizing pays off when property tax and state income tax, together with mortgage interest and charitable gifts, exceed those amounts. Homeowners in high-tax states such as New York, New Jersey, and California benefit the most from the higher cap.
Rental Property, Home Offices, and Nonresident Owners
- Rental property: property tax is fully deductible on Schedule E as an operating expense and is not subject to the SALT cap.
- Home office: the business-use percentage of property tax is deducted on Form 8829, and the remainder on Schedule A.
- Nonresident aliens (Form 1040-NR): the standard deduction is generally unavailable, and itemized deductions are limited to items such as state income tax and gifts to U.S. charities. Property tax on a U.S. home held for personal use is not deductible. If the property is rented and the Section 871(d) net election is in effect, the tax is deductible as a rental expense.
- Property tax on a home in Japan: U.S. residents cannot deduct foreign real property taxes on Schedule A, whether on a Japanese home or a family house; this restriction was made permanent by the OBBBA. Property tax on a rented Japanese property remains deductible as a rental expense.
Frequently Asked Questions
Which year’s property tax do I deduct?
The year in which it was actually paid. If your lender paid it from escrow, use the amount reported on the year-end Form 1098. Amounts merely deposited into escrow but not yet paid to the taxing authority are not deductible.
My income is above the phase-down threshold. Is there anything I can do?
Above the MAGI threshold, the cap shrinks by 30 cents for every dollar of excess income. Strategies include retirement plan contributions or shifting income between years to manage MAGI, and for business owners, state pass-through entity (PTE) tax elections. The right approach depends on your situation, so review it with a tax professional.
How is the property tax proration at closing handled?
Property tax prorated between buyer and seller at closing is deducted by whoever bore it: the buyer deducts the buyer’s share and the seller deducts the seller’s share. Keep the Closing Disclosure as support.
This article is provided for general informational purposes only and does not constitute individual tax advice. Please review current IRS rules and applicable state and local regulations, and consult a qualified U.S. tax professional before acting.
Summary
U.S. property tax is a local tax that varies enormously by location and drives the cost of owning a home. Assessments can be appealed, and primary-residence exemptions generally require an application. Property tax paid counts toward the SALT deduction, which allows up to $40,400 in 2026 but phases down for high earners and is scheduled to revert to $10,000 in 2030. Remember the distinctions: rental property tax is fully deductible on Schedule E, while property tax on a nonresident’s personal-use U.S. home or on a home in Japan is not deductible at all.
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- US Real Estate Investing While Living in Japan: Form 1040NR and the Net Election Under Section 871(d)