Every year, millions of homeowners deal with property taxes. In most situations, when the tax bill comes, if it seems reasonable, most people would pay it and move on with their lives. That being said, to make sure that you are not being overcharged on property taxes, it's important to understand how they are calculated and how property values are determined.
Property Tax 101
Determining Property Taxes
The property taxes that are being accumulated by the states and the federal governments serve as a major source of income. In most cases, these taxes come in the form of a percentage, where many different councils, boards and legislatures will decide the appropriate amount of tax revenue that needs to be raised. They will have a hearing on the budget to decide the amount of money that will be needed so that the government can cover its expenses with no financial challenges in the year ahead. The services that are normally funded by property taxes include: education, emergency services, transportation, libraries and parks as well as different recreational activities.
Calculating Property Taxes
The way that property taxes are calculated would be through the use of the mill levy and the assessed property value.
Mill Levy or Millage Tax
The mill levy is simply the tax rate levied on your property value, with one mill representing one tenth of one cent. So, for $1,000 of assessed property value, one mill would be equal to one dollar. Tax levies for each tax jurisdiction in an area are calculated separately and then all the levies are added together to determine the total mill rate for an entire region. Generally, the city, county and school district each have the power to levy against the properties in their boundaries. So each entity would calculate its required mill levy and it would all be tallied up to equal the total mill levy.
As an example of a mill levy calculation, suppose the total assessed property value in a county is $100,000,000, and the county decides it needs $1,000,000 in tax revenues to run the county. The mill levy would simply be $1,000,000 divided by $100,000,000, and equals 1%. Now, suppose the city and school district calculated a mill levy of 0.5% and 3% respectively. The total mill levy for the region would be 4.5% (1+0.5+3) or 45 mills.
Assessed Value of Property
Property taxes are calculated by taking the mill levy, like we've determined in the previous example, and multiplying it by the assessed value of your property. The assessed value is a yearly estimation performed to decide the reasonable market value for your home based upon prevailing local real estate market conditions.
The assessor will review all relevant information surrounding your property to make an estimate of the overall value. To provide you with the most accurate assessment, the assessor must look at what similar properties are selling for under the current market conditions, how much the replacement costs for the property would be, the maintenance costs for the property owner, if any improvements were completed, the amount of income you are making from the property, and the amount of interest charged to purchase or construct a property comparable to yours.
After the assessor has this information, there are three ways that your property will be valued:
Performing a Sales Evaluation
The assessor will value your property based on similar sales which have taken place in the area. As this method is being used it is important to look at overpricing, underpricing, the location of the property and the overall state of the property.
The Cost Method
This is when the assessor determines your property value based on how much it would cost to replace your property. If the property is not new, assessors determine the amount of depreciation that has taken place and how much the property would be worth if it was empty.
The Income Method
This method is based on how much income you would make from the property if it were rented. Using this method, the assessor must be sure to consider factors such as: costs for maintaining the property, cost to manage the property, insurance, taxes and the return that you could reasonably anticipate from the property. After determining market value for the property, the assessed value will be determined by taking the actual value of the property and multiplying it by an assessment rate. The assessment rate is a uniform percentage and varies by tax jurisdiction, and could be any percentage below 100%. After getting the assessed value, it is multiplied by the mill levy to determine your taxes due.
For example, suppose the assessor determines your property value is $500,000 and the assessment rate is 8%. The assessed value would be $40,000. Now taking the mill levy of 4.5% we calculated previously, the tax due would be $1,800 ($40,000 x 4.5%).
The Bottom Line
Property taxes can be very confusing for many homeowners. To ensure that you are paying the right amount in property tax, you must understand how the property is valued and how the taxes are calculated.
Question: How to lower my property tax?
Here’s how to challenge the assessment, boost your odds of success, and ultimately put more money in your pocket:
Understand the process
Review your property card
Gather evidence
Your ammunition: comps. Find out what 5 to 10 comparable homes in your neighborhood have recently sold for (in the last 6 months) — comparable in terms of age, size, and district. “Use a site like Zillow or just have a friendly real-estate agent in the area pull these up for you,” says Davis. “Most will do it for free because they want to build good will; plus, it only takes them 10 minutes and they can just email this to you or give you a print out.” Back up your case with any relevant photos. “Preparation for this process can go a long way in helping your case,” says Mitch Roschelle, a partner at PwC, and the firm’s U.S. Real Estate Advisory Practice leader. “Towns are inundated with appeal applications and those that are well organized and well supported stand the best chance of being considered.”
Submit your package
While some areas allow you to email your packages and others require you to call in and make your case in person, most appeals are submitted in written form to the county boards, along with a statement explaining why you feel the evaluation is inaccurate. Claims must be supported with the aforementioned evidence (comps and pictures).
Go it alone
While there’s no shortage of professionals — from attorneys to real-estate agents to consultants and appraisers — available to help you make your case, here are two reasons to go it alone, says Sepp. First, legitimate third party experts, while they can save you a lot of time, energy, and frustration, are going to pocket a big chunk of your tax savings — a flat percentage of up to 50% of your first year’s reduction. Second, some appeals boards are more sympathetic to homeowners who represent themselves. “There’s the ‘believability’ factor,” says Sepp.
Be professional
As you’re sitting in your designated room, or cubicle, one-on-one with the adjuster assigned to your case, “don’t plead poverty, get angry or belligerent; just present your case as to why your taxes need to be lower, and then shut up,” says Davis. Then, reap the rewards. “Over 30% of researched, prepared homeowners have some kind of success appealing,” says Sepp. “And it can make a dramatic difference in your bill, especially if you live in a jurisdiction that will allow that new assessment to stay in place for several years.”
Resource from: Property Taxes: How They Are Calculated | Investopedia http://www.investopedia.com/articles/tax/09/calculate-property-tax.asp#ixzz4Ngi61YIw
http://www.marketwatch.com/story/6-ways-to-lower-your-property-taxes-2015-05-06
