Real Estate Tax Law
Real estate property tax is sometimes called a millage tax or an “ad valorem” tax, names that refer to how it is calculated, as explained below. The tax is imposed by the governing authority of the jurisdiction in which the property is located. It is usually paid to a local governmental body, such as a county, and includes taxes imposed by special purpose districts, such as school and library districts. Property taxes vary greatly from area to area and are often a major source of revenue for local governmental bodies.
For homeowners, the burden of the property tax can be substantial. It constitutes about one quarter of homeownership costs at the median home ownership duration. In recent years, some states have enacted laws to limit property tax burdens. These laws range from restrictions on the property tax formula, explained below, to reductions or “caps” on tax liability. Homestead exemptions lower property tax bills for owner-occupied housing, while “circuit breakers” reduce the level of tax for certain homeowners, usually the elderly or low-income households. Abatements eliminate the tax on designated parcels of land or for classes of taxpayers, such as seniors or veterans. Some states require supermajorities to increase property taxes.
Real estate tax, which is based on ownership of land and buildings, should be distinguished from a tax on personal property, on rents, or on intangible investments, such as stocks and bonds. General real estate taxes, which are based on property value, should also be distinguished from special assessments, which are based on some benefit to the property, such as the installation of new sidewalks.
Assessment
The process generally starts with the local assessor’s office, which reviews and values all the property to be assessed in the jurisdiction. Your local assessor may have a website that explains that process in detail. In establishing value, the assessor will consider the size and location of the land, the number and size of structures, the number and type of rooms and other physical characteristics of those structures, and the quality of construction. This information may be compared to the sale prices of similar properties or used to estimate the cost to replace the structures or the potential rental income. How often the assessor reexamines valuation differs from area to area. Generally, the sale of property or the issuance of permits for home improvement will trigger reevaluation of its market value.
In some states, an “equalization” ratio is applied to the market value of the property. The purpose is to account for different property values and different tax rates in various areas of the state. For example, if an “equalization factor” of 80 percent is applied to a property with a market value of $200,000, the result would be $160,000.
The equalized assessed value is then multiplied by the property tax rate, which is often expressed as a percentage or as “per mill,” meaning the amount of tax per thousand dollars of property value. That rate is based on the needs of several different taxing bodies. To calculate the property tax, the assessed value is multiplied by the mill rate and then divided by 1,000. For example, a property with an assessed value of $50,000 located in a municipality with a mill rate of 20 mills would have a property tax bill of $1,000 per year. Any applicable exemptions or abatements are then applied.
Challenging the Assessment
While the assessor does not set the tax rate, which is not subject to an individual challenge, you can challenge the valuation of your property or the failure to apply exemptions or abatements to which you believe you are entitled. Contact the assessor’s office and ask how the valuation was calculated and how to initiate an appeal. Check for errors in the description of your property. Consider particular characteristics that might reduce the value of your property as compared to other properties, such as a location on a busy street. Examine recent comparable sales. There are now several websites that provide this information. A real estate agent may be willing to help. You can also hire an appraiser, but before you spend the money, ask whether the appeals body accepts outside appraisals as evidence.
