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Tax Assessment: What It Is And How It Determines Your Property Tax

8-Minute Read
Published on December 29, 2020
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Getting hit with property taxes each year is hardly the highlight of any homeowner’s financial calendar. But these fees, which are the result of tax assessments, also produce significant revenue for local and state governments, which utilize the funds to maintain essential public works and services. More importantly, your property tax assessment helps determine just how big your property tax bill will be, making understanding how it’s calculated important to accurately predict how much you’ll owe. Knowing how a property tax assessment works can help you determine how big your annual bill will be so you can budget accordingly.

What Is A Tax Assessment?

A tax assessment determines the value of a piece of real estate. Tax assessment is usually conducted by a government assessor who uses the assessed value of a property to calculate the amount of tax due on the property. Property taxes are charged by cities and towns to homeowners for their ownership of real estate assets – and are levied upon them even if their mortgage has been fully paid off. Collecting these taxes, which are paid for by property owners, enables governments to pay for public services (i.e. municipal police forces, sanitation operations, and emergency rescue response solutions) and projects. As a result, regardless of the type of home you own (including condos, apartments, single-family, or multi-family units), you can expect to pay property taxes on it.

In fact, if you’re already making a mortgage payment, you’re likely paying property taxes already. That’s because mortgage lenders often like to estimate annual property taxes in advance and bundle them into your monthly bill. Under these circumstances, an escrow account is set aside to collect these funds each month and disburse them for payment when due, with no further action required of homeowners. A tax assessment can help you get a sense of whether these escrow payments are anticipated to rise or fall in the coming year ahead.

How Are Property Taxes Assessed?

Property taxes vary from county to county and state to state, and are paid at regular intervals, most commonly annually. Several factors such as the assessed value of your home or other homes in your area, and your local government’s budget needs, can impact your property tax bill as well. There are three main ways in which the value of real estate property is assessed.

Replacement method: Under the replacement method, assessors make an estimate of how much it would cost to replace a building or structure using current market rates for expenses such as labor and material. The tax assessor will also take property depreciation into account when evaluating the structure and deduct it from the assessment but will also add in and account for the value of land within their findings. It’s a method of assessment most commonly utilized for specialized, unique, or new properties.

Sales comparison method: A method of property tax assessment in which the sale of properties with similar attributes are compared, though adjustments are made for unique property features or characteristics when rendering a determination. The majority of residential real estate is assessed in this fashion.

Income method: The income method involves tax assessors making an estimate of how much income might be derived from a real estate property if it were leveraged in such a fashion as to help the owner generate an income. It requires the assessor to consider how much money the property might bring in as well as factors such as operating expenses, maintenance and upkeep, and the cost of insurance. Apartments, commercial properties, office buildings and retail properties are often assessed in this fashion.

Property Taxes Vs. Tax Assessment Vs. Market Value

To make things simple, it may help to consider that your property taxes are computed based on your tax assessment. But your tax assessment itself is determined by a number of factors that are unique to your location, including but not limited fair market value for properties situated in the local area. The amount of taxes that you’ll ultimately pay (based on the findings of your tax assessment) can also be reduced by tax exemptions.

Upon receiving a tax assessment from your local municipality, you’ll notice that while the layout of the document itself may differ between counties, it will include the name of the person or persons on the title responsible for paying the bill. It will also list out any exemptions that you qualify for that will ultimately lower your property’s taxable value. The major points that affect your actual tax bill are the assessed value and the taxable value of your property. The taxable value of your home will be based on, but not the same as, your assessed property value.

Let’s take a look at appraised value first to see how everything works.

Appraised Value

The appraised value of your home obtained as the result of a licensed inspector’s home appraisal. Think of it as an evaluation of the worth of your home based on its physical attributes and comparable properties in your local market. As opposed to fair market value, an appraised value is subjective and based upon an individual opinion. Two appraisers may come up with different tallies for a home’s appraised value (and you can always request a second opinion), though the appraisals typically should fall within a similar range and not change too drastically.

Effectively representing a single professional’s working opinion, an appraised value – which will compare and contrast your home with similar local properties – may approximate the fair market value of a house. But it’s not the be-all, end-all when it comes to determining how much your home is worth in the eyes of taxation authorities.

Assessed Value

The assessed value of your real estate defines how much your property is worth for taxable purposes. Sometimes this number will align with the property’s appraisal value, but more frequently will not. That’s because:

  • It’s simply not practical to evaluate every house in your locality every year. As a result, your property valuations are often based on the general value of houses in your area.
  • Many states don’t tax homeowners based on the full value of the property, but rather some percentage of the full value that becomes the assessed value.
  • Some states reassess property values every year while others do it at less frequent intervals, i.e. only after a given number of years. Still more may only assess your property at the time that it is purchased.
  • Individual states may have limits imposed on how high that your property taxes can rise. In these locations, it’s possible for property values to increase at a higher rate, though the amount of taxes that you actually pay will be capped at a lower amount.
  • Rather than reassess home values every year, select states may instead tie property tax increases to the rate of inflation.

Certain events may also trigger a reassessment of property value. Such triggers might include a change of ownership, or a recent remodeling that results in a new addition to the home. As a result, it’s important to consult state and local laws before considering how much you might owe in property taxes.

Taxable Value

Once you have computed your property’s assessed value, you can then figure out its taxable value. To figure out how much of your property value will be taxed at the tax rate in your area, you’ll want to take your assessed value and subtract out any exemptions that you qualify for.

The most common one you might expect to take would be the homestead property exemption. Under the terms of the homestead property exemption, you are allowed to subtract a certain amount from the taxable value of a property if the piece of real estate is your primary residence. In addition, select states may also offer additional exemptions if you’re disabled, a veteran, or live on certain types of land, for example. Any exemptions that you qualify for will help you lower your aggregate tax bill

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Calculating Property Tax

Your property tax bill will be calculated based on the assessed value of your property, your given property tax rate, and any exemptions for which you qualify. A variety of factors may impact it, ranging from your property’s size and age to its build type and location, as well as the specific use (residential, commercial, etc.) that the property is currently being applied towards.

The property tax assessment process will take several variables from total square footage of your home to number of bedrooms and bathrooms and any property upgrades into account. Noting this, adding enhancements such as a deck, patio or additional bedroom or bathroom can impact your property tax assessment, as can external factors such as improvements to or a general rise in value among other homes in your neighborhood. Note that your property tax rate will ultimately be expressed in numeric form as a mill rate (aka percentage rate) against which the assessed value of your home is multiplied to calculate your tax bill. The mill rate (or mill levy) is determined by weighing government budgets against the assessed property values in the area being serviced and dividing required funds amongst the collective population of homeowners.

Should municipalities wish to increase your bill, they can increase either your property’s assessed value or the tax rate associated with your home. It’s not uncommon for budget shortfalls around city hall to cause property taxes to rise over time.

Assessment Increases And Decreases

As above, tax assessments might increase or decrease as homes receive upgrades and enhancements, grow in demand and value, or suffer the effects of age and time. Likewise, they may also commonly be revised as properties are bought and sold, or at select intervals as predetermined by your local municipality. Budgetary concerns may additionally regularly bring about routine changes to your property taxes, which you can expect to encounter on periodic occasions as well.

Property Taxes And Escrow

If your mortgage is serviced by Quicken Loans®, you most likely have an escrow account that contains funds set aside for expenses including taxes and homeowners insurance. This escrow account allows you to spread your tax and insurance payments out over the course of any given year. In practical terms, the upside it offers is the ability not to have to make a single, large payment out of your checking account once a year.

However, take note: If your property taxes go up in any given year, it can cause a shortage in your escrow account that could lead to either the need for an additional one-time payment or higher escrow amounts to be deposited into your monthly mortgage payment in the next year.

By analyzing your tax assessment from the local county in which you reside, or your local taxing authority, you can get a better idea of any expenses coming down the pike before your next escrow analysis.

Challenging Your Property Tax Assessment

As a homeowner, you have the right to appeal a tax assessment with which you do not agree. You can also request a formal reassessment of a property. Be advised that the process for applying for a reassessment or securing tax deductions and property tax freezes as needed may vary by your county, municipality or state location. If you find that you do not concur with your property tax bill, be sure to reach out to your local tax authority to determine how to formally request review and reassessment.

The Bottom Line

Property taxes can go up or down based on a variety of factors and are impacted by your property tax assessment. They may also be reevaluated at routine intervals and must be paid regardless of whether you currently carry an active mortgage. While taxation authorities have leeway to adjust your property tax bill by changing the assessed value of your property though, you also have the right as a homeowner to request a formal reassessment.

Among the most important bills to pay, unpaid property taxes can come with interest and penalties attached. Failure to pay them can also result in the loss of your property. Government leaders take the payment of property taxes seriously, as funds paid through these programs go to support many key public agencies and services each year.

However, if you find yourself facing an undue tax burden, take heart. Special assistance and tax relief programs may be available. In addition, you may also wish to consider refinancing your mortgage as a handy way to alleviate any financial concerns.

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