Understanding property taxes

After the passage of sweeping changes to the U.S. federal tax code at the very end of 2017, the topic of taxation became an even hotter topic than usual. Those new rules and restrictions won't impact the average filer until 2019, when tax returns for the previous year are due. Still, the entire situation has many reassessing how they manage taxes of all kinds, including state and local taxes subject to their own changes. Perhaps the most significant is property tax, levied on homeowners and businesses in many states and municipalities around the U.S.

"Property taxes are among the oldest source of public revenue in the U.S."

According to a policy brief from the Institute on Taxation and Economic Policy, property taxes are among the oldest significant revenue source for public institutions throughout the U.S. However, they differ significantly from the income taxes most of us are familiar with because they are administered at the local level, rather than through the federal government. This local focus of property taxation makes for a more transparent funding process - citizens can lobby for or against tax changes in town hall meetings with elected city officials, and they see the tangible benefits of that revenue in the form of new or upgraded schools, roads and other public services.

The local nature of the property tax can be a drawback as well, since it means the laws governing it can vary considerably from one place to another. Still, as explained by the ITEP, the same basic principles apply everywhere: Real property is taxed at a predetermined rate based on its assessed market value.

Here's the basic outline of the process:

  1. The market value of each individual property is assessed by the local authority on this process. While this is ostensibly the amount of money a property could be expected to sell for in its present condition, the policy in many municipalities is to assess certain types of property (especially homes) at a fraction of their true market value.
  2. This taxable value of a property is then subject to the applicable millage rate or mill levy. This is another rate that varies from county to county, and is determined based on the county's total assessed property value as well as its expected revenue needs. A millage rate can also be assessed by a local school district or other public service agency and added to the total for any given property.
  3. A property's taxable value multiplied by its total millage rate gives its final property tax bill before any credits are applied. Various municipalities might offer credits to certain types of properties or uses for those properties, however they are not always deducted at the same time as they are paid. In many cases, property owners must apply for those credits and then await reimbursement at a later time.
TaxesProperty tax laws can be confounding to homeowners and businesses alike.

Appealing property taxes

To make the system as fair as possible, taxpayers are usually allowed to review how their bill was calculated and appeal the findings to their local authority. The assessed value of a property, for example, is perhaps the most common point of contention in the property tax system. 

According to Investopedia, there are three general methods used by officials to assess the value of a property before calculating its tax rate:

  • For most residential homes, the sales evaluation method is the most commonly used. In this case, the assessor arrives at a home's market value by comparing it to similar properties in the same area that were recently sold. Projected value is then added or deducted according to its condition, amenities and other considerations.
  • If recent comparable sales are not available for a given property, the tax assessment may be based on the estimated cost of replacing it. This is calculated by adding up the cost of all materials and labor that went into building the property, adjusted for inflation or depreciation.
  • The third most common assessment method is based on the property's income. This might be useful for a business or other land parcel in which most value comes from rent or sales, not necessarily its material cost or location.

Assessment officials are required to prove their findings through extensive recordkeeping and showing their work. Still, there is the possibility that some subjectivity could creep into these findings. As U.S. News and World Report explained, property owners can review and contest their assessments, but this is usually a drawn-out process that does not always end in success. A more promising way to contest a tax assessment might involve hiring an independent real estate appraiser, who is knowledgeable in the field and can make a more authoritative case on the owner's behalf.

Most tax topics are confusing, and property taxes are certainly no exception. Be sure to consult with a professional who is experienced in your specific situation before making any major tax decisions.

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