Property Tax Basics
Depending on a number of factors, primarily location, your property taxes represent a significant chunk of your overall tax payments. However, it's important to remember that this revenue is used locally for such vital resources and services as public schools, fire and police protection, roads, parks, streets, sewer and/or water treatment systems, garbage removal, and public libraries. In turn, a vital community with these important amenities will help maintain the value of your property; thus, property taxes and property values have symbiotic relationship (at least in theory)..
It's a good idea to get up to speed on property tax basics if you are a homeowner or planning to become one.
Determining Property Tax Rates
Taxing land and buildings is one of the oldest forms of taxation in the U.S. Before income and sales taxes, local governments used property-based taxes to finance most of their activities. Property taxes remain a major source of revenue for local governments.
Property Tax Limitations
State constitutions or statutes commonly impose rate limitations. Many states set a maximum rate for each class of government (e.g., school, city, or county). Because real property can be located in overlapping tax districts (e.g. schools and towns), the total tax rates will vary from one neighborhood to another.
This results in more than one local taxing authority calculating tax rates for the property. Many jurisdictions aggregate these rates, resulting in a single tax levy called a "consolidated", "overall", or "composite" levy.
"Ad Valorem" Taxes
Some taxes are based on a proportion of the value of the property being taxed. These are known as "ad valorem" taxes. To arrive at an accurate amount of tax, an appraisal of the taxable subject matter's value needs to be done periodically. When the property owner's property value changes, so does their assessed or appraised value. Most property taxes are this ad valorem variety. Ad valorem property taxes are based on ownership of the property. Property owners must pay these taxes whether they actually use the property or not or whether it generates income for them or not.
Property Tax Assessments
A property tax assessment is basically an estimate of what a piece of property is worth. This valuation of the property helps decide what part of the local property tax levy will be billed to the property. Once this has been determined, the value is multiplied by the tax rates, sometimes known as the "mill rate," to determine how much tax the owner must pay on that piece of property. Many states use full market value (or a fraction of it) as a basis for their assessments.
Despite these similar terms, most states focus on "market value." Market value is the amount of money a typical, knowledgeable, buyer (unrelated to the seller) would pay for a given parcel of property. To calculate the market value of a piece of property, an assessor will determine if there have been changes in the real estate market where the property is situated. The assessor will examine what different types of property are selling for, local construction costs, normal operating expenses like utilities, nearby rental rates, and inflation. Changes in these factors may change the assessed value of the property.
Assessors "value" property for tax appraisal purposes. "Value" is also known as the following:
• Actual value
• Appraisal value
• Fair and reasonable market value
• Fair cash value
• Full and fair value
• Full value
• Just value
• Market value
• True value
1) The price at which a buyer is ready and willing to buy and a seller is ready and willing to sell.
2) Market price.
2) Market price.
Assessing Personal Property
To make assessments of most personal property, appraisers use information contained on personal property statements filed by the property owner. If the property owner does not provide information about the value of his or her personal property, the assessor estimates the property's value using acceptable appraisal data and techniques, taking into consideration factors such as the age, cost, and type of property. Depending on the state or locality, tax rates for personal property may be the same as that for real property or may differ.
Types of Property for Tax Purposes
Below you will find key information about real and personal property and where to go if your additional questions. Remember, it is always best to consult with a local real estate attorney before making any major real estate decisions to be sure you have the most up-to-date law in front of you.
Real and Personal Property Overview
There are two basic categories of property: real and personal. The assessment procedures and the tax rate will vary between these two categories. Real property, in general, is land and anything permanently affixed to land (e.g. wells or buildings). Structures such as homes, apartments, offices, and commercial buildings (and the land to which they are attached) are typical examples of real property.
Basically, personal property is any property that is not real property. Personal property is not permanently attached to land. In most cases, it is moveable and does not last as long as real property. Personal property includes vehicles, farm equipment, jewelry, household goods, stocks, and bonds.
Types of Personal Property
Personal property is divided into "tangible" and "intangible" forms. Tangible personal property is just that: it has a physical form. It can be seen, touched, and moved. Examples of tangible personal property include clothing, books, and computers. On the other hand, the notion of intangible personal property is an abstraction. They do not usually have physical forms (other than certificates or accompanying records). These include assets such as patents, trademarks, stocks, and bonds.
Classes of Property
In addition to the basic types of property, property is grouped into various classes and subclasses for purposes of tax assessment. These classes are based on the property's use. These schedules of classes vary considerably from state to state. For example, a state may have the following classes of property.
Property classification according to various uses or types serves as a basis for adjusting the rate of tax.
For example, a state may have the following classes of property:
• Class 1: Agriculture, grazing, livestock, notes, bonds, stocks, accounts receivable
• Class 2: Commercial properties
• Class 3: Motor vehicles
• Class 4: Personal property, except motor vehicles
• Class 5: Residential, farm homes
• Class 6: Swamp and waste
Assessing Real Property
There are three principal methods for assessing the value of real property. These differ based on the kind of property being assessed.
1. The cost (or replacement) method
This method is used for assessing buildings or other structures. Assessors estimate how much it would cost, using current rates for material and labor, to replace a given structure. An assessor will deduct the reasonable depreciation of the property but add the value of the land. This approach is most appropriate when the assessment is of a new and unique or specialized property. It is also useful when there are no meaningful sales of comparable properties.
2. The income method
Under this method, assessors estimate the amount of income from a piece of property if the property is used to produce an income. This method is used for apartments, stores, warehouses, shopping centers, and office buildings. To arrive at an assessment, the assessor considers the business taxes, the amount of income the property may generate, insurance costs, rates of vacancy, operating expenses, maintenance costs, and the current interest rate charged for borrowing money for making improvements or repairs on such a property.
3. The market or sales comparison method
Here, sales of similar properties are compared to each other and adjusted for differences. Most residential real estate is appraised by using the market or sales comparison method. This approach is similar to the method banks employ to value property when they consider issuing a mortgage.