Uncovering the Mystery Behind Property Taxes

Property taxes can be a mystery to many homeowners, even though it's something everyone pays. How property taxes are calculated, what they help pay for, who sets the rates, and how the "assessed" value of the home is determined are some of the questions surrounding this unsolved case, so let's get down to it and crack the code.

The first clue to uncovering how property taxes are calculated is realizing that property taxes are local taxes that provide a major source of income to local governments to help pay for schools, libraries, roads, police, fire protection and many other services. Obviously, it costs to provide these services, so once the different governing authorities, such as the city, county and local school districts that provide these services, set their budget for the coming year; they will determine a mill levy, or tax rate, needed to cover these annual expenses. 

Calculating Property Taxes

Property taxes are calculated using a mill rate, or the tax per dollar of assessed value of property, where one mill is one-tenth of a cent ($.001). So for $2,000, one mill would be equal to $2.

For example, say the county mill rate is 1%, the city's is 0.03% and the local school district's is 0.02%, the total mill rate, or property tax rate, for that jurisdiction 1.05%.

Property taxes are calculated by taking the mill levy, or property tax rate, and multiplying it by the assessed value of the property. This leads to the next question, how is a property "assessed" to determine its value?

Assessing the Value of the Property

A property's assessed value is based on its market value, or how much the property would sell for under normal conditions, as determined by the assessor, i.e. the local official who estimates the value of all the properties in the community. Once the market value is determined, the assessed value is calculated by multiplying the market value by the assessment rate.

There are a few different methods an assessor may use to determine a property's market value:

1. Market Approach - With this approach the assessor will compare the property to similar properties that have recently sold. This is the most common approach for residential properties.
2. Income Approach - This approach determines the value based on how much income it would make if it were rented out, while also considering how much it would cost to manage and maintain the property.
3. Cost Approach - This approach looks at how much it would cost to replace the property, including the structure and land, minus any depreciation.

The level of assessment(LOA) or assessment rate is then multiplied by the fair market value to determine the assessed value of the property. The LOA is the percentage of full value at which properties are being assessed within a community, and is established by the assessor.  To calculate your property tax, multiply the assessed value of the property by the total mill levy or tax rate.

For example, a home that has a market value of $300,000 and exists within a community where the LOA is 85%, the assessed value of the property would be $255,000. By multiplying the previously established property tax rate of 1.05%, by the assessed value of $255,000, the end result are property taxes of $2677.50.

If you are ever unsure about the assessed value of your property, you can contact your local county or municipality and discuss it with the assessor. Obviously it's important that the property is assessed fairly so that you pay fair property taxes.

Mystery solved! Hopefully by now you fully understand the purpose of property taxes and how they are determined.