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

8-Minute Read
Published on April 15, 2021

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, produce significant revenue which funds essential public works and services.

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 it. Regardless of the type of home you own, you can expect to pay property taxes.

If you’re 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 Do Property Tax Assessments Work? 

Property taxes vary by county and 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.

Am I Required To Pay Property Taxes? 

All real property owners are required to pay property taxes. This includes your primary residence, any secondary residences or vacation homes, investment properties and any other type of land in your name.

If you are renting a piece of property and do not own it, you do not have to pay property taxes. In this case, that falls to the actual property owner of the residence or land that you pay rent to.

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Different Types Of Property Tax Assessments

There are three main methods of property assessment that may determine the value of your taxes: the replacement method, the sales comparison method, and the income method.

Replacement Method

Under the replacement method, assessors 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. 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. Adjustments are made for unique property features 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 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.

What Factors Influence Your Property Tax Bill? 

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, such as fair market value. The amount of taxes that you’ll ultimately pay can also be reduced by tax exemptions.

Your tax assessment will include the name of the person or persons on the title responsible for paying the bill. It will also list any exemptions that you qualify for that will lower your property’s taxable value. The major points that affect your 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 is obtained via 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. An appraised value is subjective and based on 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.

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. This is due to a number of reasons, including the fact that it’s not practical to evaluate every house in an area every year – and some states reassess property values very infrequently.

Certain events may trigger a reassessment of property value, such as 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

Taxable value determines a homeowner’s tax liability. 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. You can then find your taxable value by multiplying your property’s assessed value, minus exemptions, by the local milage rate.

The most common exemption taxpayers may consider is the “homestead exemption.” Under the terms of the homestead property exemption, you’re allowed to subtract a certain amount from the taxable value of a property if that property 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.

Calculating Property Tax

Your property tax bill will be calculated based on the assessed valuation of your property, your given property tax rate, and any exemptions for which you qualify.

The property tax assessment process will take several variables into account, including the total square footage of your home, number of bedrooms, bathrooms and any property upgrades. Enhancements such as a deck, patio or additional bedroom can also impact your property tax assessment, as can external factors such as a general rise in value among other homes in your neighborhood.

Your property tax rate will ultimately be expressed in numeric form as a millage rate (aka percentage rate) against which the assessed value of your home is multiplied to calculate your tax bill.

Assessment Increases And Decreases

Tax assessments might increase or decrease as homes receive upgrades, 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 occasionally 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 account allows you to spread your tax and insurance payments out over the course of any given year rather than make one large payment annually.

However, if your property tax payments go up, 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. The process to apply for a reassessment or secure tax deductions and property tax freezes as needed may vary by your county or state location. If you find that you do not concur with your property tax bill or other tax information, be sure to reach out to your local tax authority to determine how to formally request review and reassessment.

The Bottom Line

Property tax payments can go up or down based on a variety of factors and are impacted by your property tax assessment. While taxation authorities have leeway to adjust your property tax bill by changing the assessed value of your property, you also have the right as a homeowner to request a formal reassessment.

If you find yourself facing an undue tax burden, 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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