How Property Taxes Are Calculated

Every year, millions of homeowners pay property taxes. In most situations, when the tax bill comes, if it seems reasonable they pay it and move on with their lives. That being said, to make sure you are not being overcharged on property taxes, it is imperative to maximize your returns and lower your costs.

For example, raw land will have no replacement costs when there are no structures on it. If there is access to public services, such as sewer, water and gas, the assessment might be higher. If the assessor feels that the land has the potential to be developed, it could lead to a higher assessment and more taxes for the owner. Understanding how property taxes are calculated is critical for making sure the appropriate rates are charged. This is the key to paying the lowest taxes possible and maximizing your returns.

Property taxes are a major source of income for city, county and state governments. These taxes come from a percentage of the assessed value of the property. The different boards, councils and legislatures meet to decide the appropriate rates. They hold budget hearings to determine how much money needs to be allocated for providing different services. These services – such as education, transportation, emergency, parks, recreation and libraries – are funded by property taxes. 

Starting with the 2018 tax year, the Tax Cuts and Jobs Act placed a cap of $10,000 per year ($5,000 for those married and filing separately) on federal deductions for state and local taxes (SALT). This includes all real estate, income and sales taxes on property. Understanding which deductions apply and how property taxes are calculated will help prevent you from overpaying.

Property taxes are calculated using the value of the property. This includes both the land and the buildings on it. Every one to five years, tax assessors will value the property and charge the owner the appropriate rate, using the standards set by the municipality. Assessors calculate that value using either the mill levy or the assessed property value.

The mill levy is the tax rate levied on your property value, with one mill representing one-tenth of one cent. So, for $1,000 of assessed property value, one mill would be equal to $1. Tax levies for each tax jurisdiction in an area are calculated separately; then, all the levies are added together to determine the total mill rate for an entire region. Generally, city, county and school districts each have the power to levy taxes against the properties in their boundaries. Each entity calculates its required mill levy, and they are then tallied up to equal the total mill levy.

As an example of a mill-levy calculation, suppose the total assessed property value in a county is $100 million, and the county decides it needs $1 million in tax revenues to run the county. The mill levy would simply be $1 million divided by $100 million, which equals 1%. Now, suppose the city and school district calculated a mill levy of 0.5% and 3%, respectively. The total mill levy for the region would be 4.5% (1% + 0.5% + 3%) or 45 mills.

Property taxes are calculated by taking the mill levy and multiplying it by the assessed value of your property. The assessed value estimates the reasonable market value for your home. It is based upon prevailing local real estate market conditions.

The assessor will review all relevant information surrounding your property to estimate its overall value. To give you the most accurate assessment, the assessor must look at what similar properties are selling for under the current market conditions, how much the replacement costs for the property would be, the maintenance costs for the property owner, any improvements that were completed, any income you are making from the property and how much interest would be charged to purchase or construct a property comparable to yours.

The assessor can estimate the market value of the property by using three different methods and has the option of choosing a single one or any combination of the three.

The assessor values the property using similar sales in the area. Criteria include location, the state of the property, any improvements and the overall market conditions. The assessor then makes adjustments in the figures to show specific changes to the property, such as new additions and renovations.

This is when the assessor determines your property value based on how much it would cost to replace it. If the property is older, assessors determine the amount of depreciation that has taken place and how much the property would be worth if it were empty. For newer properties the assessor deducts any realistic depreciation and looks at the costs of building materials and labor, including these figures in the final value of the property.

This method is based on how much income you would make from the property if it were rented. Using this method, the assessor must be sure to consider the costs of maintaining the property, managing the property, insurance and taxes, as well as the return you could reasonably anticipate from the property. After determining market value for the property, the assessed value will be arrived at by taking its actual value and multiplying it by an assessment rate. That rate is a uniform percentage, varies by tax jurisdiction and could be any percentage below 100%. After getting the assessed value, it is multiplied by the mill levy to determine your taxes due.

For example, suppose the assessor determines that your property value is $500,000 and the assessment rate is 8%. The assessed value would be $40,000. Taking the mill levy of 4.5% we calculated previously, the tax due would be $1,800 ($40,000 x 4.5%). 

Once the assessor has the value, they work in two stages:  First, they send the assessed value of the property to the owner; then, they follow it up with a tax bill.

Most property tax bills are sent on either an annual or a five-year basis. The property tax information is mailed separately, after the owner has received the assessment, with its valuation of the property. The information the assessor has is public record. Owners can see how much they must pay by going to the assessor’s website and entering their address. Sometimes they may be charged a small fee for accessing the material. Another option is to go to the assessor’s office in the county courthouse. All that is needed is the address. You can look up the information and print out a copy for a nominal fee.

Property taxes can be confusing. Paying the right amount requires understanding how the tax is calculated, possible deductions, where to get this information and when tax bills are sent out and due. This helps property owners to stay educated by knowing how the taxes are calculated, the billing cycle and where they can locate it.