Back to Investing Wiki

How Property Taxes Are Calculated

Millions of homeowners pay property taxes each year. It’s crucial to understand the calculations behind how property taxes are assessed by the property appraiser’s office in your community, rather than merely paying the tax bill when it’s due. You can ensure that you are not being overcharged this way.

Assessing Property Tax

Different sorts of taxes are assessed on the land and its structures, depending on the property classification. Vacant land, for example, will have a substantially lower assessed value than a comparable piece of renovated property, resulting in cheaper property taxes. The land assessment may be greater if there is access to public facilities such as sewer, water, and gas. If the assessor believes the land has development potential, the owner may face a higher assessment and higher taxes. A percentage of the property’s assessed value is used to determine how much a property is taxed.

Property taxes are a significant source of revenue for local governments. The proper rates are decided by various boards, councils, and legislatures. They hold budget hearings to determine how much money is needed to provide the many services that the community requires. Property taxes provide for services including education, transit, emergency services, parks, recreation, and libraries.

Calculating Property Taxes

The valuation of the property is used to calculate property taxes. This refers to both the land and the buildings on it. Tax assessors will typically evaluate the property every one to five years and charge the owner-of-record the appropriate rate based on the taxing authority’s requirements. Assessors use the mill levy–also known as the millage tax–and the assessed property value to arrive at that figure.

Mill Levy or Millage Tax

The mill levy is a tax rate based on the value of your home, with one mill equalling one-tenth of a cent. One mill equals $1 for every $1,000 in assessed property value.

Tax levies for each tax jurisdiction in an area are computed separately, and then the total mill rate for the region is calculated by adding all the levies together. In general, each city, county, and school district has the authority to impose taxes on the properties within its jurisdiction. Each entity determines its own mill levy, which is then added together to determine the total mill levy.

Assume a county’s total assessed property worth is $100 million, and the county determines that it requires $1 million in tax income to run its operations. The mill levy would be calculated as $1 million divided by $100 million, totalling 1%.

Let’s say the city and school district both came up with a mill levy of 0.5 % and 3%, respectively. The region’s total mill levy would be 45 mills, or 4.5 % (1 % + 0.5 percent + 3 %).

3 Ways to Assess Property Value

The assessor has the choice of employing one of three methodologies to estimate the market value of the property, or any combination of the three.

1. Performing a Sales Evaluation

The assessor determines the value of the property by looking at recent sales in the region. The location, the condition of the property, any improvements, and the overall market circumstances are all factors to consider. After that, the assessor adjusts the figures to reflect particular changes to the property, such as new additions and renovations.

2. The Cost Method

This is when the assessor evaluates the value of your home based on the cost of replacing it. Assessors calculate the amount of depreciation that has occurred and how much the property would be worth if it were unoccupied if it is older. For newer properties, the assessor subtracts any reasonable depreciation and considers the price of construction materials and labor, including these costs, into the property’s ultimate value.

3. The Income Method

This method is based on how much money you could make if you rented the home. The assessor examines the costs of maintaining, managing, insurance, and taxes, as well as the return you could reasonably expect from the property when using the income method approach. After assessing the property’s market value, the assessed value will be calculated by multiplying the actual value by an assessment rate. That rate is a fixed proportion that varies by tax jurisdiction and could be anything below 100%. The assessed value is multiplied by the mill levy to determine the amount of property taxes owed.

Assume the assessor concludes that your property is worth $500,000 and that the assessment rate is 8%. The assessed value of the property would be $40,000. Using the 4.5 % mill levy we determined earlier, the tax due would be $1,800 ($40,000 x 4.5%).

The assessor works in two stages after they have the value: They provide the owner the assessed value of the property first, and then a tax bill after that.

The Bottom Line

Taxes on property investment might be confusing. Understanding how the tax is computed, where to receive this information, and when tax bills are sent out and due are all necessary for paying the correct amount. Residents in some cities can view and/or pay their property tax bills online. Property owners may help themselves stay informed by learning how taxes are calculated when the billing cycle is, and where they can get it.

Looking for a stress-free way to get started in real estate investing? See how BuyProperly employs a fractional ownership concept to assist investors to build their real estate portfolios by having a look at our properties.

Related Articles to Property Taxes

  1. Flipping vs Renting: Which Strategy is Better for Real Estate Investors?
  2. How to Choos​e an Investment Property: A Step-by-Step Guide
  3. How to Become a Real Estate Investor: A Step-by-Step Guide
  4. How to Invest in Real Estate Without Fear of Rejection
  5. 11 Real Estate Investing Mistakes to Avoid
  6. The 5 Types of Real Estate Investments
  7. When’s the Right Time to Invest and 4 Factors to Consider