What are property taxes and how do you budget for them?

Owning a home (or any other piece of property) means assuming responsibility for a whole bundle of expenses, with property taxes ranking as one of the most opaque of the bunch.

It can be daunting to have to understand and plan for yet another bill, but CNBC Select breaks down what you need to know about property taxes and how to manage them.

Property taxes are simply taxes you pay on a property — like a house, condo or apartment — that you own. They're based on your property's value and what your local municipality (or county) sets as the tax rate. Local governments use property taxes to fund public services such as libraries, community pools and various other community-based projects.

Because what you pay in property taxes falls largely outside your direct control, it's important to make the most of the other decisions that affect home affordability — such as where you get your mortgage. CNBC Select ranked Ally Bank as one of the best mortgage lenders since it doesn't charge lender fees. Chase Bank is another solid contender since it offers a loan option — called the DreaMaker loan — that requires a down payment as low as 3%.

There's actually a pretty simple formula for estimating your property taxes: You take the assessed value of your home and multiply it by the imposed tax rate.

What determines your tax rate?

Property taxes are imposed by the city, municipality or county in which the property is located to fund local initiatives and services. Because of this, your tax rate could be influenced by your local government's budget for those initiatives and its general need for funds. As reported by CNBC, if states decrease funding for these projects then the money to cover those costs has to come from somewhere. Oftentimes, that cost gets passed onto homeowners in the form of a higher property tax rate.

As a homeowner you have little control over your tax rates (outside of participating in the political process), but you can try to live in an area where your property tax is funding amenities and services important to you (assuming you have that kind of flexibility in choosing where to live). If you have young children, for instance, cities that do a great job with maintaining and implementing new parks and community pools may align with your lifestyle needs.

What determines your home's assessed value?

Professional assessors (also known as appraisers) working for local governments determine the value of all land and properties located within a specific city or county. They use a number of variables to assess the fair market value of your home and levy property tax amounts accordingly.

Remember that formula for calculating a property tax estimate? When you take a high-assessed home value and multiply it by the tax rate, you'll get a higher tax bill estimate. That's why tax bills are typically highest in neighborhoods where property values are also high, according to New Jersey Future, a non-profit organization that researches policy development around infrastructure, community, transportation and more.

The most direct way you can influence your home's assessed value (and therefore your property tax bill) is through home renovations. This is because certain renovation projects — like updating an old kitchen, replacing carpeting with hardwood floors, or even converting your property from a single-family home to a two-family home — can increase your home's resale value. In theory, this increases the assessed value of your home and will lead to a higher tax bill.

However, homeowners can challenge the assessed value of their homes if they feel something is off. The exact guidelines will vary depending on your state, city, or county but homeowners can expect to receive their assessments in the mail at the beginning of every year along with deadlines for challenging the assessment.

There are two main ways to pay your property taxes: either as part of your monthly mortgage payment or paid directly to your local tax office.

Property taxes are billed on a quarterly basis. So if you choose to pay your tax office directly, you'll receive a bill four times a year with instructions on how to pay. You should be able to mail a check or money order, pay over the phone, or pay online using a debit or credit card.

But if you choose to pay your taxes alongside your mortgage payments, your monthly payments will actually be held in what's known as an escrow account. Even though you're making monthly tax payments, the money has to sit in an escrow account because the tax bill only comes around once every quarter. When your tax bill is due, the money in the escrow account will then be used to pay the tax bill.

In this case, your taxes do increase your monthly payment but they have no bearing on the actual terms of your mortgage.

You can use the formula above (assessed value x tax rate = property tax estimate) to get an idea of how much you'll have to pay in property taxes in any given year.

If you're rolling your property taxes into your monthly mortgage payments, that yearly bill will be divided into 12 equal, fixed payments. Just make sure you have room in your budget to make these monthly payments, the same as you would with any other expense.

Paying your property taxes in quarterly lump sums takes a little more math to pull off. One simple approach is to divide your quarterly property tax bill by three to figure out what you have to pay every month. Then put aside that amount every month until it's time to pay the quarterly tax bill.

It's worth setting aside that cash in a high-yield savings account, which allows your money to earn a higher-than-average interest rate.

Property taxes can feel like yet another thing you have to pay for as a homeowner but the good news is that you can actually write off your payments as a tax deduction when you file your federal taxes. Of course, there are a few key things to know about what tax payments are eligible for a tax deduction and which ones aren't.

First off, you may deduct property taxes paid on your primary home, vacation home, boats, owned land, and vehicles.

However, there are several instances where you cannot deduct taxes paid for expenses related to your home. This includes taxes paid on a rental property or commercial property, the cost of home renovations, costs from utilities, taxes on a property you don't own, and future taxes (taxes you owe but haven't paid yet), to name a few.

Next, you can only claim the property tax deduction if you itemize your tax deductions. Itemizing your deductions means listing out and adding up all the deductions you're making, and then subtracting that amount from your taxable income. This differs from a standard deduction, which is a fixed dollar amount used to reduce your taxable income. Your filing status determines how large your standard deduction will be.

• Single or married filing separately: $12,950
• Married filing jointly or qualifying widow(er): $25,900
• Head of household: $19,400

In some cases, claiming the standard deduction results in a greater reduction of your taxable income than if you itemized your deductions. Because of this, you'll want to work with a tax professional to see whether it makes more sense for you to file the standard deduction or itemized deductions. Just keep in mind that you can only claim a deduction for your property taxes if you choose to itemize your deductions.

Property taxes are pretty much inevitable no matter where you buy your home or how much it costs. Make sure you factor them into your budget when purchasing a home just like any other expense.

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