Explained: Assessed Property Valuations
A county property assessor plays a critical role in determining the market value, assessed value, and taxable value of properties within their jurisdiction. Here's a brief explanation of how this process typically works:
- Market Value : Market value is the estimated worth of a property in an open and competitive real estate market. Property assessors use various methods to determine this value:
- Sales Comparison Approach: This method involves analyzing recent sales of similar properties in the area. By comparing the subject property to these recent sales, assessors can estimate its market value.
- Cost Approach: Assessors also consider the cost of replacing the property. This approach takes into account the cost of constructing a similar property from scratch, minus depreciation.
- Income Approach: For income-generating properties like agricultural land and rental units, assessors may use the income they generate to estimate market value. This is often used for commercial properties.
- Assessed Value: The assessed value is a portion of the property's market value used for tax purposes. In some areas, the assessor applies a predetermined assessment ratio to the market value to calculate the assessed value. This ratio is often set by state laws and can vary by property type. In other areas, jurisdictions impose limitations on how much the assessed value of a property can increase each year. This is often referred to as a "assessment cap". For example, a property's assessed value might be allowed to increase by a maximum of 3% per year, even if its market value has grown by a larger percentage. This helps protect property owners from sudden and significant increases in property taxes.
- Taxable Value: The taxable value is what is actually used to calculate property taxes. It is often based on the assessed value, but it can be further adjusted based on exemptions, special assessment districts, and other factors. Property tax rates are typically set by local governments, school districts, and other taxing authorities. The taxable value is multiplied by the actual tax rates to determine the property owner's annual tax liability.
Example: A Single Family Home might have a market value of approximately $300,000, based on looking at what other comparables properties are sold for in the market at the current time. That is the Market Value.
This same home might have been bought for $200,000, eight years ago, and have a 3% annual cap on assessed value increases. Based on those annual increases, it may have raised its Assessed Value from $200,000 eight years ago to $250,000 (still well below it's Market Value).
This same home might be "homesteaded", another assessment incentive to allow homeowners to lighten the tax amount of their primary residence. This homestead can come in the form of a $25,000 "Exemption", meaning that much more of the assessed value is excluded from being used for tax calculations. The $250,000 Assessed Value, less then $25,000 Exemption, yields a $225,000 Taxable Value. (That is 25% lower in valuation than the Market Value, based on those tax incentive programs.) When it is time to generate a tax bill for the property, the core amount will be based on multiplying $225,000 * the tax rate for that area.
Note: The Market Value calculated by the local assessment officials is an attempt to gauge true market value, but it may not be perfectly accurate either. Sometimes their systems are calibrated to be "conservative", meaning those values are perhaps 5% below the actual market. Also, that number is often calculated a year or more before the assessment and tax bill is prepared. This often means those Market Value amounts are out-of-date, and often lower than true current market values by 10% or more.
Imprecise Market Values don't necessarily mean the assessment system is unfair. As long as all properties are assessed at the same 10% below the true market value, the required tax rate may adjust up by 10% as well, meaning everyone's net tax amount could remain roughly the same as if the values were truly precise. The same may be true if the market goes down, leaving Market Values seemingly inflated temporarily.
Generating truly accurate Market Values on a large scale is a very difficult job, and there will always be particular properties that are assessed out-of-line compared to the others. Some people may wish to challenge the valuation of their property....they should factor all of these issues in before making any such determination.