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What Is a Property Tax Assessment?

Oct 01, 2020 by Aly J. Yale

If you own property -- commercial or residential -- you'll owe taxes on it annually. Those taxes are used to pay for local services, schools, government operational costs, law enforcement, and more.

How much will those taxes be? That depends on your property tax assessment, or your local taxing jurisdiction's estimate of what your home or building is worth.

Want help determining how much your annual property tax bill could be -- or when it might be coming? What if your property tax assessment is too high? Here's what you need to know.

What is a property tax assessment?

A property tax assessment is an estimate of what your home or investment property is worth in your local market. This estimate is multiplied by the tax rate set for your specific jurisdiction to determine your annual property tax bill. This rate is sometimes called a mill rate, mill levy, or millage rate.

In some cases, property owners may qualify for a property tax exemption, which could lower the assessed property value and thus your tax bill. The homestead exemption is one such example. In my area, the homestead exemption is worth $25,000. So a qualifying homeowner with a property assessed at $200,000 would only be taxed for $175,000.

Many jurisdictions also offer veterans exemptions, exemptions for seniors age 65 or older, and exemptions for disabled homeowners. You'll want to check with your local taxing authority to see what exemptions are available.

How are property tax assessments determined?

Several methods are used to determine property values. These include the comparable sales method, the replacement cost method, and the income method, which we explain below.

The comparable sales method

One of the more common ways to determine a property's value is through comparable sales. With this strategy, the property assessor uses recent comparable property sales -- homes in the same neighborhood that are the same age, size, condition, etc. -- to determine what the home would likely sell for in the current market (its current market value). This strategy is similar to an appraisal, which your lender had likely conducted when you initially purchased the property.

The replacement cost method

This assessment approach bases a property's value on how much it would cost to replace. It takes into account age of the property, condition, depreciation, local building costs, and more. It's similar to how an insurance company determines how much coverage you need for your home.

The income method

This is typically used for business and commercial properties, though it may be used on residential properties in some jurisdictions. For commercial properties, it usually uses the income generated by the business as the building's value (after taking into account taxes, operating costs, etc.). In the case of a business not yet operating or a residential building, the taxing jurisdiction may use the property's potential rental income as the value instead.

Timing of property tax assessments

Exactly when your property value will be assessed depends on your tax authority. In some jurisdictions, it's done annually. In others, it may be every five years or only when a property changes hands.

Regardless of when your assessment happens, you'll still have to pay property taxes annually. The timing of these bills varies, too. Here in Texas, we receive our tax bills at the end of the year, with the balance due by February 1. In some areas, property owners may receive multiple tax bills per year, allowing them to pay their taxes in installments.

Disputing your property tax assessment

If you believe your property tax assessment is wrong (and your tax bill too high), there are options. First, you can look into exemptions in your area if you qualify. These can often reduce your assessed value by thousands, lowering your tax bill with it.

Additionally, you can also dispute or appeal your home's assessed value. The exact process for this again varies by location but usually requires filling out a form, offering some form of evidence for your home's lower value, and, in some cases, going before a review board for a hearing.

Here are some examples of evidence you might be able to use to reduce your property's assessed value:

  • A closing statement if you recently purchased the home for a lower price than its current assessed value. Make sure it has a date and the total purchase price on it.
  • Photographs of the property showing it needs repairs or is in poor condition. Things like foundation issues, roof problems, and other costly repairs can help here.
  • Recent comparable real estate sales in the area. The sales should be of properties similar in age, condition, and size to yours. You can ask a local real estate agent to pull these for you if you're not sure where to start.
  • Contractor estimates for repairs or updates the home may need. The higher the estimates, the better.

You should also have a local agent give you an estimate of what your taxable value should be assessed at. This can be good information to have on hand if you need to go before a review board.

A little disclaimer here: Lots of law firms and tax professionals advertise property tax dispute services. In most cases, paying for these services isn't worth it. Not only is disputing your property value with your local tax authority free, but there's no guarantee it will be successful. Paying extra money for a professional might just result in more financial losses.

Property taxes during the COVID-19 pandemic

Many jurisdictions are offering property tax relief during the pandemic. If you've lost your job, seen reduced wages, or are otherwise struggling financially due to COVID-19, check with your local tax assessor's office or appraisal district. There may be ways to reduce your tax burden or put off paying your bill until later.

The bottom line

If you're a commercial or residential property owner, then a tax assessment and tax bill are in your future. Make sure you check with your local tax authority to find out when and how those will be determined. This can help you plan ahead (and budget) for those costs.

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