In pictures: How surging home prices nuked Montana’s property tax balance — and how a second-home tax might fix it

Skyrocketing home values and ensuing property tax shifts have caused widespread anxiety across Montana in recent years, spurring lawmakers to pass a landmark second-home tax intended to lower taxes for resident homeowners and landlords who lease out long-term rental properties.

Both Montana’s existing property tax code and the relief package that made it through the legislative sausage grinder this year are bafflingly complex, perplexing many Montanans who would like to understand the mechanics behind a law that is supposed to lower — or raise — their tax bills.

This piece is an effort to bring clarity to that confusion.

MONTANA’S TAX MATH

It’s easiest to think about the property tax system in terms of a town with just a few properties, as opposed to the tens of thousands in even mid-size Montana jurisdictions.

Here’s how tax bills would be calculated in a hypothetical community with eight houses, two businesses, some farmland and some industrial property. It’s roughly what Montana’s property tax landscape would have looked like in 2020 scaled down to a handful of parcels. We’re going to call it the Town of Exampleville:

Property values are assigned by the Montana Department of Revenue. For residential property, they reflect the department’s estimate of what the property would theoretically sell for. Those market values are then translated into taxable values via rates specified by the Montana Legislature. The calculations can be done either property by property or for a particular property class lumped together.

The taxable value, essentially the share of each property’s market value that’s subject to taxation, is generally a few cents for each dollar of market value. The total taxable value for all property in a given jurisdiction is its tax base — the pool of value a local government’s leaders can draw on to fund its operation.

The residential properties in our Exampleville tax base represent just over half of the town’s taxable value. That’s on par with what Montana looked like at the start of the COVID-19 pandemic era in 2020.

The next step in the tax math is using the taxable values to generate actual tax bills, factoring in both statewide and local property taxes. Those calculations are easiest to follow for a single home. We’ll use one valued by the state at $225,000, which was approximately the statewide median as of 2021:

For this illustration, we assume that the home and the other properties in our tax base pay 95 mills of statewide taxes and support an Exampleville town budget that requires a $40,000 a year in property tax revenues. In reality, most taxpayers also pay some additional state-level taxes and cover a share of the local taxes for overlapping school, county and municipal tax jurisdictions, but we’re doing our best to keep things simple.

The taxable value is important in two ways. First, it’s used to calculate statewide school funding taxes, which are defined in terms of “mills.” Each mill produces a dollar in taxes for each $1,000 in taxable value.

Second, the taxable value is used to assign a property its share of the local tax base. That share is also the share of the local government budget its owner is responsible for paying.

A house with a taxable value representing 1% of a small town’s tax base, for example, ends up responsible for 1% of the town’s tax collections. Similarly, a large industrial facility that represents 10% of a town’s tax base is responsible for paying 10% of the town’s tax collections.

Under the 1.35% taxable value rate in effect in 2020, a $225,000 house has a taxable value of slightly more than $3,000. That is 4.5% of the Exampleville tax base. 

Voter-approved local taxes are sometimes specified in terms of mills instead of dollar amounts, in which case their math works like statewide taxes. County treasurers also use mills in their calculations when they combine tax obligations from multiple jurisdictions to produce the tax bills mailed out each fall. 

But it’s generally easier to think about local taxes — the main contributor to most property tax bills — in terms of tax base share rather than mills. The key concept to keep in mind is that the greater your property’s taxable value, the greater your share of the local school or sheriff’s office budget.

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NUKING THE TAX BALANCE

The market value of homes across Montana has shot up since the start of the pandemic, dropping a financial bomb on the prior tax balance.

The median residential property value as assessed by the state revenue department increased 35% during the 2023 reappraisal cycle, followed by a 22% increase in this year’s reappraisal cycle. Combined, that makes for a 66% increase in the median home valuation in four years — a seismic jump.

That sudden shift follows decades of slower movement that have made the property tax system increasingly dependent on residential taxpayers. The residential share of the Montana tax base in 2021, 52%, was already up from 35% in 1996.

Other dynamics have also tugged at the tax system in the pandemic era. Valuations for many commercial properties are also up by double-digit percentages in recent years, for example. Additionally, the real-world tax picture is further complicated by local government budget growth and the addition of newly built homes to tax rolls.

For clarity in our neat little model, we’ll look at what happens to tax bills if the only change is the 66% value increase clobbering existing residential property owners:

Higher values mean a bigger share of taxes for the eight homes in Exampleville, which now represent 65% of the tax base rather than 53%. That means they’re now responsible for nearly two-thirds of the property taxes, as opposed to half.

That’s enough of a shift to produce a whopping 29% increase to each residential tax bill.

In comparison, commercial, agricultural and industrial properties see notable savings because they now represent a smaller share of the tax base — even though their valuations haven’t changed.

Here’s how the specific math works out for one of Exampleville’s $225,000 homes. After 66% value growth, it’s now valued at $373,500, which is a touch less than the real-world Montana median as of 2025:

The extra $148,500 in market value bumps up the home’s taxable value, boosting the mill-based statewide taxes proportionately. It also increases the home’s share of the town tax base, meaning it picks up a bigger portion of the taxes that support the Exampleville budget.

That double-whammy produces a combined tax bill that’s $605 higher — even though the statewide millage rate is unchanged and the town budget hasn’t grown by a single penny.

Similar dynamics have played out in real-world Montana, causing consternation for taxpayers, local government officials and state lawmakers. A MTFP analysis of data from the state revenue department concluded that, in 2023, a 40% increase in the market value of residential properties helped produce a 21% increase in taxes. Many homeowners — particularly those in fast-growing urban counties — saw even bigger increases.

Those higher tax bills propelled property tax relief to a must-tackle issue for Montana policymakers as the state Legislature met this year. But, as it turned out, identifying a politically feasible solution was easier said than done.

RATE REBALANCING WHAC-A-MOLE

Many of the proposals debated in the Legislature this year involved reworking taxable value conversion rates, the dials that lawmakers can turn to shift how much tax burden falls on different types of property. Turn the prior 1.35% residential rate down to 1%, for example, and homes end up with lower taxable values — and, by extension, lower tax base shares and lower tax bills.

At least in theory, that makes it possible to rework the tax system to reset the balance when values for a particular type of property grow out of proportion to others. Here’s what it would look like to offset Exampleville’s 66% residential value growth:

Dialing the residential rate down by 66% to offset value growth returns the taxable values for residential properties to their original levels. As a result, it resets the tax base shares back to the prior balance — and resets both statewide and local tax collections.

Lawmakers considered several proposals this year that would have reworked taxable value rates along these lines. Because the real-world tax system also saw non-residential property values change, most proposals redialed rates for multiple property classes and used different rate numbers than the change we’ve shown here.

The challenge for those simple rebalancing fixes is that the real world includes much more variability than the highly simplified Exampleville model, creating complexity that doesn’t intersect cleanly with a one-size-fits-all rate rebalance.

For example, the revenue department’s mass appraisal algorithms try to take home size and condition into account, meaning they often generate different value growth estimates for neighboring homes. As a result, state-level rate redialing undercorrects for some individual properties and overcorrects for others. Additionally, the real estate markets and tax base compositions of many of Montana’s hundreds of far-flung taxing jurisdictions vary wildly from the statewide average.

That’s why the prospect of tinkering with statewide taxable value rates produced substantial angst at the Capitol this year, with opponents fretting about the potential to throw the tax system in certain parts of the state into further disarray.

While a rebalance calibrated to our model tax base represents a clean reset for the uniformly average community of Exampleville, it would overcorrect for a rural, agriculture-heavy tax base where home values have grown more slowly — pushing residential taxes below their previous levels, forcing a tax increase for other properties in turn:

With just 25% residential value growth in what we’re calling Farmville (modeled after Daniels County in northeast Montana), the 66% redial that works for Exampleville shifts Farmville’s residential properties to below their prior share of the tax base.

The result is lower tax bills for homeowners, but higher taxes for Farmville’s farmland, businesses and industrial property.

The policy challenge is more than hypothetical. Data from the state revenue department estimates that median home value growth across Montana’s 56 counties ranged from 19% to 130% over the past two reappraisal cycles. Add in hundreds of municipalities and school districts with their own taxing jurisdictions, and resetting tax shares via rate rebalancing starts to feel like a game of multidimensional whac-a-mole.

That headache prompted some lawmakers to propose measures that would simply buy down homeowner property tax bills by offering annual tax bill rebates. 

A $500 buy-down for homeowners would equate to a nearly 20% reduction for each $373,500 owner-occupied home in Exampleville, enough to essentially roll 2023 taxes back to 2022 levels. It would also produce a smaller 8% reduction for a higher-value $830,000 home, while leaving tax bills for rental properties and second homes untouched:

The upside of this approach is its simplicity, given that it wouldn’t touch the tax math for non-residential property. However, an ongoing rebate produces another conundrum: the money to pay for it has to come from somewhere outside the property tax system.

An analysis of one rebate bill proposed this year estimated that 230,000 primary residences would be eligible. A $500 annual rebate would translate to a $115-million-a-year expense for the state — more than twice the annual budget of the Montana Highway Patrol.

Many of the property tax relief proposals debated at the Legislature this year would have covered their cost by directly or indirectly tapping the state General Fund, which is primarily funded by state income tax collections and has been flush with cash in recent years. Gov. Greg Gianforte, who was advocating for a major income tax cut he signed in April, opposed using General Fund money to pay for ongoing property tax relief.

Another option for funding property tax relief is a general sales tax, levied either statewide or in specific localities. Montana already allows high-tourism resort communities to levy local-option sales taxes, and local leaders in some parts of the state have for years wanted the Legislature to broaden that authority.

Some prominent lawmakers and business leaders believe Montana, currently one of five states without a statewide sales tax, will eventually need that revenue to provide a long-term solution to the property tax crunch. But political figures including the governor, who earlier this year compared adopting a sales tax to eating a tapeworm, see a sales tax as prohibitively unpopular with the Montana public.

HOW THE SECOND-HOME TAX ‘FIX’ WILL WORK

After much wrangling at the Capitol this year, lawmakers settled on property tax legislation that combines higher tax rates for second homes and luxury properties with a “homestead” exemption that offers lower rates to most homes that qualify as principal residences.

The idea is that higher taxes on second homes and high-value properties can offset lower tax bills for the homes of resident taxpayers while minimizing how much burden is shifted to other classes of property. The package includes provisions intended to shield agricultural properties and smaller businesses from increases as rate changes shift taxes across property classes. 

The implementation details are — to put it mildly — complex. That’s partly because of how the measure tackles the rate-balancing conundrum, and partly because the revenue department determined it wouldn’t be able to implement the higher second-home rates this year, forcing lawmakers to specify interim rates for 2025 tax bills.

The legislation also offers a one-time $400 homeowner rebate, which homeowners can apply for through Oct. 1, 2025. But the heart of the policy is a suite of new taxable value rates, which spin many of the tax system’s existing dials while wiring in several new ones.

Here’s how the rate system will change in the coming years:

Montana’s prior tax code already had two dials for residential properties, applying the commercial rate to home structure value in excess of $1.5 million. Starting with an interim system for this year’s tax bills, though, the residential property math will feature rate tiers that look something like income tax brackets, where higher appraised values are converted to taxable values — and ultimately taxed — at higher rates.

That complexity will be bumped a step further come 2026, when a multi-tier system with generally lower rates will be applied to principal residences that qualify for homestead treatment. Other residences — second homes and short-term rentals — will have their rates dialed up to 1.90%.

Both the interim and permanent rates also apply a two-tier system to commercial property, a step intended to shield small business properties from taxes shifted away from homes. Agricultural land will also get a slight discount, and home structures on agricultural land, which are taxed as residential property, will be allowed to maintain their prior 1.35% rate regardless of occupancy status.

When the revenue department sent reappraisal notices to homeowners in real-world Montana this year, many saw the market value of their property increase, while its taxable value decreased. That’s because of the changes made to the 2025 tax rates. 

Broadly speaking, the new rates will lower taxes on modest homes by reducing their taxable values relative to high-value residences and second homes. Here’s how that math works:

Both modest and higher-value residential properties will typically see reduced taxable values under the interim rates coming into effect this year, regardless of their occupancy status — a 44% reduction in the case of a $373,500 home.

As the second-home tax and homestead exemption come into effect in 2026, residential properties that don’t qualify for the homestead treatment will see their taxable values bounce much higher. While the high-value home in Exampleville has a market value about three-and-a-half times that of the median home, its tax valuation under the new code will be nearly nine times as much.

Of course, how all this taxable value math translates into actual tax bills depends on the tax values assigned to a particular home and what’s happening with the properties around them. Here’s how the new rates for 2025 and 2026 would shift the tax shares for individual homes in Exampleville relative to what those shares were before and after the residential value spike:

The interim rates for 2025, which don’t distinguish between principal residences and second homes, provide most residential properties with substantial savings by shrinking their share of the pie. That resets the tax shares falling on other property classes to roughly what they were before home values spiked.

Then, once the full-fledged second-home tax rates kick in in 2026, the tax shares for residences that don’t qualify for homestead rates bump up substantially. The high-end second home in our model sees its tax share increase to 30% in 2026. The result of that heavier burden on homestead-ineligible residences is a reduction to tax shares for other properties.

Additionally, while the homestead-ineligible Airbnb rental in Exampleville is valued at $373,500, the same as most of the other houses, its tax share with the second-home tax applied is higher than an owner-occupied $830,000 house, meaning it picks up a slightly larger share of the town’s taxes. The Airbnb’s 2026 taxable value, $7,097, is 2.5 times that of a long-term rental with an equivalent market value.

The ultimate effect of the second-home tax, at least in Exampleville, is a major tax increase for the high-value second home — and lower taxes for everyone else. It’s unclear, of course, how accurately this highly simplified model can predict what will happen to tax bills in a given part of real-world Montana.

Readers who are curious about that might take a look at a prior MTFP story based on preliminary county-by-county projections from the revenue department. Statewide, those projections estimate that tax bills for owner-occupied homes will decrease by 18% on average over the next two years, while forecasting a 68% average increase for non-homestead residential properties. 

We should also note that the numbers we’ve used throughout this piece don’t account for a major factor that’s very real in many, if not most, Montana jurisdictions: growing local government tax collections driven in part by budget pressures stemming from inflation. Any extra amounts collected by local jurisdictions will eat into savings produced by the new rates — or load even higher bills onto properties that will be paying more.

Have more questions about the second-home tax policy, or how the property tax system works more broadly? MTFP has been maintaining a Q&A on how the tax system is changing and our team welcomes your questions and comments. 

Also, if you’re (ahem) the sort of person who wants to review the calculations behind the graphics in this piece, a spreadsheet with the math used to build them is available here.

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