Property taxes are a major expense of being a homeowner, and the way that local governments calculate how to charge an appropriate property tax can be both frustrating and confusing. One key to understanding property taxes is in calculating your property's assessed value, which forms the basis for the tax calculation. Below, we'll look at some of the idiosyncrasies you'll run into with assessed value.
The simplest property assessment methods
Some local governments use the very simple technique of estimating the fair market value of a property and using that number as its assessed value. Doing so has the benefit of tying assessed value directly to the market value, making it easier for both homeowners and prospective home buyers to have at least one estimate of the true worth of a home.
To calculate assessed value, tax assessors will compare your home to similar properties in the area, looking for characteristics that make properties comparable to each other. Because property values can be highly dependent on location, all assessment methods have potential flaws, and that's why many homeowners choose to contest their assessed values.
Complications with assessed values
Property tax laws vary greatly from place to place, and not all local governments use such a simple system. In some cases, a local government will assess taxes on only a percentage of the value of the property. To calculate the assessed value when a local government uses such a percentage, you'll have to take the property's fair market value and then multiply it by the chosen percentage.
Some states also offer exemptions for a portion of your property's value. In that case, you'll need to start with the fair market value but then exclude the appropriate amount corresponding to the exemption.
Another way to calculate assessed value
If you know how much you owe in tax and what the property tax rate is, then you can back out the assessed value even if the tax assessor doesn't give it to you. For example, if the local tax rate is $10 per $1,000 of property value and you get a property tax bill for $3,000, then you can divide $3,000 by ($10 / $1,000) to calculate an assessed value of $300,000.
Property taxes can be complicated, but it's important to know how much you'll need to pay in making your budget as a homeowner or in considering a new home purchase. These general guidelines should help you calculate your property's assessed value so that you can compare it with other local properties and make a smart decision.
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