A property is assessed at $250,000. The tax rate is $2.50 per $100. What is the annual tax?
Audio Lesson
Duration: 2:50
Question & Answer
Review the question and all answer choices
$5,000
Answer A ($5,000) results from incorrectly multiplying $250,000 × $0.02 or using a misremembered rate; it skips the critical step of dividing by 100 before applying the $2.50 rate.
$6,250
$7,500
Answer C ($7,500) is a common arithmetic error that may result from using a rate of $3.00 per $100 instead of $2.50, or from incorrectly setting up the proportion entirely.
$2,500
Answer D ($2,500) represents only the number of $100 units in the assessed value (2,500) without completing the second step of multiplying by the $2.50 tax rate — a classic incomplete-calculation error.
Why is this correct?
The correct answer is B ($6,250) because the formula requires dividing the assessed value by 100 first: $250,000 ÷ $100 = 2,500 units. Then multiply those units by the tax rate of $2.50: 2,500 × $2.50 = $6,250. This two-step process correctly applies the 'per $100 of assessed value' rate structure used throughout Texas.
Deep Analysis
AI-powered in-depth explanation of this concept
Property tax calculations in Texas are based on the assessed value of a property divided by a unit rate — in this case, per $100 of assessed value. This 'per $100' method is the standard way Texas municipalities and counties express their tax rates, making it easy to scale the tax burden proportionally to property value. The rule exists to create a uniform, transparent system where both property owners and government entities can quickly calculate tax obligations. Understanding this formula is essential because Texas has no state income tax, making property taxes a primary revenue source for local governments.
Knowledge Background
Essential context and foundational knowledge
Texas property taxation is governed by the Texas Tax Code, Title 1, and administered by county appraisal districts established under reforms enacted in 1979 with the Property Tax Code. Before standardization, tax rates varied wildly in format across jurisdictions, causing confusion and inequity. The 'per $100 of assessed value' convention was adopted to create a consistent, scalable expression of tax burden across Texas's 254 counties. Over time, Texas has added caps and exemptions — such as the homestead exemption under Tax Code §11.13 — to limit the tax burden on primary residences.
Podcast Transcript
Full conversation between instructor and student
Instructor
Hey there, welcome back to our real estate license exam prep podcast. Today, we're diving into a medium difficulty math question that's crucial for understanding property taxes. What's the topic you have in mind?
Student
Oh, it's about calculating annual property taxes based on the assessed value and tax rate. I've been working on that a lot, but it can get a bit tricky.
Instructor
Exactly! It's important because property taxes are a significant factor in real estate transactions. Let's take a look at the question. A property is assessed at $250,000, and the tax rate is $2.50 per $100. The question asks for the annual tax. Do you see the challenge here?
Student
Yeah, I see it. It's a bit confusing with the tax rate being per $100. Shouldn't it be a percentage?
Instructor
Great observation! The tax rate is indeed per $100, which means we need to apply a two-step process. First, we divide the assessed value by 100 to find out how many $100 increments there are in $250,000. So, $250,000 divided by 100 is...
Student
2,500 increments!
Instructor
Correct! Now, the next step is to multiply those increments by the tax rate of $2.50. So, 2,500 increments times $2.50 equals...
Student
$6,250!
Instructor
Exactly! That's why the correct answer is B, $6,250. It's a good reminder that when you see a tax rate per $100, you always need to divide the assessed value by 100 first before applying the rate.
Student
Oh, I see! So, people might get confused and just multiply the assessed value by the tax rate without doing the division first, which is why options like A and C are wrong.
Instructor
Absolutely, and option D is also incorrect because it only completes the first step of the calculation. It's a common mistake to think you can skip steps, but every calculation in real estate math has a specific process.
Student
Got it. So, what's the memory technique you mentioned?
Instructor
We use the acronym DIME. It stands for Divide by 100, Increment count, Multiply by rate, and Equals tax. It's a quick reminder of the two-step process. Remember DIME, and you'll be good to go!
Student
That's a fantastic tip! I'll definitely keep that in mind. Thanks for explaining this, it helps a lot.
Instructor
You're welcome! And remember, for tax rate questions, always check if the rate is expressed per $100 or as a percentage. And don't forget to follow the DIME process. Keep practicing, and you'll get the hang of it in no time. Keep up the great work!
Use the phrase 'Divide Before You Drive' — you must divide the assessed value by the unit (100) before you drive the multiplication with the tax rate. Visualize a car that won't start (the tax calculation won't work) unless you first fill the tank (divide by 100). This two-step ignition sequence — divide, then multiply — is the engine of every 'per $100' tax problem.
Remember the four steps in order: Divide the property value by 100, count the increments, Multiply by the tax rate, and you get the final tax amount (Equals tax).
On the Texas real estate exam, always underline the phrase 'per $100' or 'per $1,000' in the question stem and write the divisor next to it before doing any math. Set up the formula explicitly: (Assessed Value ÷ Unit) × Rate = Annual Tax. This prevents the most common single-step errors and works for any mill-rate or per-unit tax question.
Real World Application
How this concept applies in actual real estate practice
Imagine a homebuyer in Austin, Texas, purchasing a home assessed at $250,000 in Travis County with a combined tax rate of $2.50 per $100. At closing, the title company's tax proration worksheet shows an annual tax of $6,250, which is then divided by 365 to calculate the daily rate of approximately $17.12. The buyer and seller split this amount based on the closing date, so the buyer credits the seller for taxes already accrued. This calculation directly affects the cash-to-close figure on the Closing Disclosure.
Continue Learning
Explore this topic in different formats
More Real Estate Math Episodes
Continue learning with related audio lessons
A property sells for $325,000. If the commission is 6%, split equally between listing and selling brokers, what does each broker receive?
2:42 • 0 plays
Property taxes on a Texas home are $6,000 per year. The sale closes on April 1. How much does the seller owe for prorated taxes?
2:56 • 0 plays
Annual property taxes are $4,380. The property closes on March 15. If the seller has NOT paid taxes for the current year, how much does the seller owe at closing? (Use 365 days)
3:08 • 97 plays
A house sells for $2,500,000. The commission check to the broker is $137,500. What percentage did the broker receive?
2:38 • 0 plays
If a bank makes an 85% loan on a house valued at $120,000, how much cash is required at closing if the buyer already paid $8,000 earnest money?
2:41 • 0 plays
Ready to Ace Your Real Estate Exam?
Access 2,500+ free podcast episodes covering all 11 exam topics.