There is a direct relationship between your property taxes and the value of your home, which should be obvious to most. The higher the value of your property the higher you will pay in property taxes, and vice versa. Often times, the terms used in property appraisals and the process by which property is taxed is confusing and can sound redundant. In the following article, I will provide a list of important property tax-related terms, and give you an overview of the property assessment process.
Your Home’s Value
There are some important distinctions to make and understand between your home’s purchase price, its “fair market value”, and its “tax assessed value”, as these are completely separate numbers by which one’s home is valued. Let’s take a closer look.
Fair Market Value (FMV)
Also known as “market value”, “fair market value” is a current market value of a particular asset (e.g., property). Basically, the value of the asset if sold today. Practically, this means that both seller and buyer are informed about the asset and both enter into a voluntary, mutual understanding and agreement, assuming the exchange is in each party’s best interest. Or, said another way, an estimated value of an asset of what a buyer would willingly pay, and seller would willingly sell.
The fair market value of a property is considered by involved parties to be an accurate appraisal or evaluation of the property’s worth. Also, several local property taxes are imposed on the FMV. In some instances, an older home will have a lower purchase value in virtue of its age, yet its property taxes and fair market value might be high.
Market Assessed Value
The current prices a property would receive on the open market in a particular year is the “market assessed value”. A government tax assessor determines this value by looking at the historical sales of comparable properties.
Tax Assessed Value (TAV)
TAV refers to a value that has been assessed by a local city or county tax authority. Any given property’s assessed tax value may be the same as its market assessed value, depending on its locality. Or, it might be valued as a percentage of the property’s fair market value. In some cases, a property’s TAV is determined by an “assessment ratio”, which in turn is used in a calculation to assess your yearly tax bill.
The Sales Comparison Approach, the Cost Approach, and the Income Approach are different methods or valuation systems to establishing a real property’s TAV. Each of these systems compares your property to a similar one in your area. The Sales Comparison Approach uses the sales of similar properties, including regular or traditional home sales, short sales, and foreclosures to assess value. The Coast Approach considers improvements, (e.g., adding a swimming pool, finished basements or attic space, remodelling, and associate construction costs), depreciation, and any structural damage, perhaps due to a natural disaster. And, the Income Approach takes into consideration decreasing or increasing rental trends.
Local government (counties, cities, and municipalities) typically impose property taxes, as generally, this is their primary means of revenue. These collected taxes are then spent to fund local fire and police department, public schooling, local public parks, road work, and other public services. You will want to check with your own local tax assessment office, as each locality follows its own policy and procedures.
Property Appraisal / Assessment
The property value assessment procedures vary county to county. Some localities (re)assess property values every few years, while some do so every year. Typically, the Cost Approach, the Sales Comparison Approach, or the Income Approach is used to assess the value of real property. After the local tax assessor determines the property’s fair market value, most counties then apply an assessment ratio, which is usually between 80-90% of the FMV, to determine the tax assessed value. Its worthy to note, there are allowed exemptions that may help lower your property’s TAV, like a veterans exemption, disability exemption, or homestead exemption.
Home Improvements Can Add Value… and Raise Your Property Taxes
While upgrades and remodels to your home will increase its market value, its good to keep in mind that this will also increase its assessed value, which translates into higher property tax. This is important to consider when you are planning permanent home improvements, like a new swimming pool, additional room, new kitchen, finished basement, adding a garage, or adding a new deck.
And, the inverse is also true. If your property can be devalued in case of instance like natural disasters, like a flood, fire, or wind. This reduced your fair market value, its taxed assessed value, and in turn your property tax bill.
Note: any valuation change first requires an official reassessment of your property.
From homeowners to insurance to daily maintenance, there are many factors to consider when you own your own home. When determining your house expense budget its important to factor in property taxes. If you are a potential homebuyer, weigh the property tax bill of the home against other local and state tax assessment policy and procedure, which will help you determine the amount of needed income to put away for taxes.