A tax assessment is used to determine the value of a piece of real estate for property tax purposes. However, a property’s assessed value isn’t necessarily the same as its market value.
As a homeowner, you know that unplanned expenses are likely to come up. Even some costs that you know you’ll be on the hook for — like your property taxes — can come as a surprise. Maybe it’s that you simply forgot that your property taxes were coming due, or perhaps the amount you owe is a bit of a surprise.
Understanding how property tax assessments work can help you to make sense of property tax bills, what determines them, why they change, and more.
What is a tax assessment?
A property tax assessment is a process local governments go through to determine property values and, therefore, how much each homeowner should pay in property taxes.
During a tax assessment, the local government assigns an assessor to analyze your home and determine its value for property tax purposes. Using the information from the assessment, a local government then calculates your property tax bill.
In most states, property taxes are due annually. However, properties aren’t necessarily assessed that often. In fact, some state and local governments only require that properties be reassessed every five to seven years.
When a tax assessment has been completed for your home, you should receive some documentation alerting you to the new assessed value of it and your new property tax bill.
Types of tax assessments
There are three primary methods assessors use when determining the value of properties. These are the replacement, sales comparison, and income methods.
1. Replacement method
The replacement method — also known as the cost method — of property assessments uses a property’s replacement value as its assessed value. In other words, how much would it cost to replace the structure at today’s market rates for labor and supplies, accounting for depreciation and land value? This method is most often used in cases of unique, specialized, or new properties.
2. Sales comparison method
The sales comparison method is the type of property assessment most commonly used for personal residences. Using this method, an assessor uses market research and the sales prices of similar homes in the area to determine the value of the home being assessed.
For example, if an assessor is analyzing a 1,500-square-foot ranch home with three bedrooms and two bathrooms, the assessor will likely compare it to recently sold homes that are 1,500 square feet, ranch style, and have three bedrooms and two bathrooms. Then the assessor will adjust the price for any features that make the home more or less valuable.
3. Income method
The income method is a type of property tax assessment often used to analyze business property. Using this method, an assessor will estimate how much income the property generates and adjust figures based on factors like insurance, business taxes, maintenance, and operating costs.
How property taxes are calculated
Once a tax assessment has been completed, it’s used to determine how much the property owner will pay in property taxes. The equation also takes into account any property tax exemptions you qualify for, as well as the local property tax rate.
Property tax rates are determined by local governments, such as cities, counties, and school districts.
“It’s important to remember assessments are used to determine how much money is needed to fund expenditures for a community adequately,” said Bill Gassett, a Realtor and the founder of Maximum Real Estate Exposure. “For example, local tax assessments will fund schools and improve roadways.”
Because these tax rates are left to local governments to decide, they can vary drastically from one location to the next. For example, average effective real estate tax rates range from 0.28% in Hawaii to 2.49% in New Jersey, according to a WalletHub study.
Assessed value vs. appraised value vs. taxable value: What’s the difference?
The assessed value of a home is the amount an assessor has determined it is worth for tax purposes. But its assessed value won’t necessarily be the same as its appraised value or its taxable value.
Assessed value vs. appraised value
A property’s appraised value is generally its fair market value. Appraised values are usually determined when someone is applying for a mortgage to buy a home. Because a financial institution doesn’t want to lend more than a property is worth, it requires an appraisal of the home.
“Quite often, assessments lag behind a property’s actual fair market value,” Gassett said. “Assessments should never be looked at as what a property is worth.”
A property appraisal usually involves looking at recent comparable sales and weighing factors like square footage, number of bedrooms and bathrooms, curb appeal, general condition, and more. The goal is to determine a reasonable sale price for the home.
If you just received the appraised value of your potential property, make sure you have the best mortgage terms and interest rates possible.
Assessed value vs. taxable value
A property’s taxable value is determined by factoring in its assessed value and any property tax exemptions the homeowner may qualify for.
An exemption is something that allows someone to protect a portion of their home’s value from property taxes. Many states have a homestead exemption, which can apply to many or all homeowners. Other states offer exemptions for veterans, disabled individuals, seniors, or other demographics. If you qualify for these exemptions, your tax liability may decrease.
How to appeal your property tax assessment
It’s possible that you’ll see your property’s assessed value and disagree with it. In that case, you have a right to either appeal the assessment or request a formal reassessment. Each local tax authority has its own process for property tax assessment appeals, so you’ll have to reach out to your local government to learn how to get the ball rolling.
Remember that tax assessments will change over time, especially as property values increase. Your assessed value may also rise as you make improvements or upgrades to the property, causing the value to increase.
It’s not realistic to expect your property’s assessed value to remain stagnant over time. However, sometimes the change might be in your favor. If an assessor determines that your property has decreased in value, your property tax bill could go down.
Is an assessment the same as a tax?
No, an assessment isn’t the same as a tax. The tax bill is the actual amount you owe to the local government, while the assessment just determines the value of the property to be taxed.
What are the types of tax assessment?
There are three types of property tax assessments: replacement method, sales comparison method, and income method. The method that’s used will depend on the type of property, since a different method is used for business versus residential properties.
Is an assessment different than an appraisal?
Yes, an assessment is different than an appraisal. An assessment determines the value of your property for tax purposes, while an appraisal determines its value for the purpose of qualifying for a mortgage.
- A tax assessment is the process of determining a property value for real estate tax purposes.
- Properties can be assessed using either the replacement method, the sales comparison method, or the income method.
- Once a property has been assessed, the property tax bill is determined by factoring in the assessed value, property tax exemptions, and the local property tax rate.
- A property’s assessed value is different from its appraised value or its taxable value, though all three are important in a specific situation.
- If you disagree with your property tax assessment, you can appeal it and request a formal reassessment.
Know how much you’re paying in property taxes
Whether you own just one property or several, every property owner must pay property taxes. And if this is your first tax year as a homeowner, you may have a tough time figuring out how much you owe in property tax.
Fortunately, we have a comparison tool of the best tax preparation services to ensure that your taxes are done accurately. Visit our comparison tool to decide which service is best for you.
View Article Sources
- Where Do People Pay the Most in Property Taxes? — Tax Foundation
- Property Tax — Arizona Department of Revenue
- What is Property Tax Relief? Five Ways to Get it — SuperMoney
- What is a Tax Abatement and How Does It Work? — SuperMoney
- Does Bankruptcy Clear Tax Debt? Everything You Need to Know — SuperMoney
- What Is Tax Evasion? Methods & Penalties Explained — SuperMoney
- What Is Mello-Roos & How to Tell If a House Is in a CFD — SuperMoney
- How to Get Out of Tax Debt: Options and Solutions — SuperMoney
- What Is Tax Planning? A Guide For Beginners — SuperMoney
- Tax Relief Industry Study — SuperMoney
- The Best Tax Relief Companies — SuperMoney
- Optima Tax Relief — SuperMoney
Erin Gobler is a Wisconsin-based personal finance writer with experience writing about mortgages, investing, taxes, personal loans, and insurance. Her work has been published in major outlets, such as SuperMoney, Fox Business, and Time.com.