How Property Taxes Are Determined
Taxes get a bad wrap. And understandably! Property taxes are no exception. However, as much as we’d like to keep that money, our property taxes play an important part in the development and maintenance of our city. Emergency services, parks, libraries, and city transportation are all possible thanks to property taxes. They also provide funding for public schools so that they can offer children free education. Like ‘em or not, property taxes come with benefits.
Unfortunately, there isn’t a simple way to establish property taxes. It changes from state to state, and even city to city. Drafting up tax figures takes some complex evaluations and fancy calculators and, unless you’re an accountant or Good Will Hunting, it can be hard to grasp. Fortunately, property taxes can ultimately be boiled down to two things; mill levies and property value.
Mill Levies (Tax Rate)
A mill levy is the tax rate levied on the value of your property. One part of the equation is the value of the property you have. The other part of the equation is the financial needs of entities like the city, the county, and the school district. The number of taxing jurisdictions will vary depending on the local government’s infrastructure, and some of these tax entities may have automatic or unchanging levies, but levies are often determined annually.
Once these entities know their financial needs for the year, they come up with a dollar figure (ie. $2.5 million needed by the school district). This dollar figure can then be used to determine an entity's required mill levy by dividing their dollar figure by the county’s total assessed property value (ie. 2.5 million projected budget for county schools/200 million in the county’s total property value).
Once the city, county, and school district have determined the levies based on their individual budget needs, the county then adds the mill levies together to come up with a single mill levy that raises funds for each of the county’s entities. This levy can be represented as a percentage (ie. 2.8%), or by a mill (with one mill equaling one tenth of a cent).
Now comes in the matter of property value. The government will assess property value -- annually or every few years -- and the estimate they come up with could be derived from a number of factors. The three most commonly used by municipalities across the US involve a sales evaluation and a little math (specifically, the cost method and the income method).
In a sales evaluation, assessors will look at the sales of similar properties within the area. They’ll also account for other factors on value like exaggerated market prices, location, and the property’s condition.
Next comes the math. In the Cost Method aspect of determining value, assessors will calculate a figure derived from the projected cost of replacing the property. Then they will put their calculators to work using the Income Method. Basically, they’ll estimate the amount of money the property would make if it was used for income (ie. rentals), minus potential expenses like rental/income taxes, insurance, and maintenance and property management costs.
With costs, income and the sale evaluation complete, the “assessed value” figure can be found by multiplying the actual value of the property by the assessment rate. The assessed value is then multiplied by the mill levy to calculate….. You guessed it! Property taxes.
As you can see, determining property taxes isn’t a simple process. It can also be a surprise expense that hits homeowners harder than they had expected. If you’re in this position like so many other property owners, contact us for information on property tax loans and how they can help you.