Real Estate Tax Assessments & Appeals

Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

In this lesson, we'll discuss property taxes and how they're calculated. We'll also discuss real estate assessments and how they can be formally challenged.

Real Estate Tax Defined

George has just received a bill for property taxes. Local appraisal districts impose property taxes on those who own real estate within their boundaries. Tax money is used to pay for services the local government provides to its residents. For example, school boards often rely on tax revenue to educate students and maintain their facilities. Sometimes property taxes are due on an annual basis but sometimes the tax will be divided into semi-annual or quarterly payments. George is required to pay a total of $3,600 for the year which is due in one lump sum.

George's annual property tax should not be confused with real estate transfer tax. Real estate transfer tax is assessed upon the transfer of real property from one person to another. The grantor, or the seller, usually pays the tax, but this may vary.

Property Assessment

George's property tax is based upon his county's assessment of the property's fair market value. Fair market value is the price at which a willing and knowledgeable seller will sell a property and a willing and knowledgeable buyer will buy a property. The county will assess both the land and all the structures on it to determine the value. George's house is a 2,000 square foot ranch style home with three bedrooms and two bathrooms. It's located in a suburban lot of average size.

Property values are not static. Markets push prices up and down. Houses can deteriorate in value if not properly maintained. On the other hand, renovations and new additions can increase the value of property and, in turn, the property tax bill. This is why most appraisal districts periodically reassess properties.

Calculating Property Taxes

You can apply the following general formula to determine property tax:

Property Tax = ((Assessed Value - Exemptions) * Mill Rate)/1000

Let's see how the formula works.

We already know that the assessed value is the fair market value of the property. The mill rate , or property tax rate, is the amount George will have to pay the government for each dollar of the assessed value of his property. A mill is equal to one-thousandth of a dollar or $0.001. An exemption is a certain dollar value that some taxpayers are able to exclude from the assessed value of the property to lower their tax costs. Perhaps the most common exemption is the homestead exemption which applies to property that a taxpayer is using as a home.

George's property was reassessed right after his property underwent renovations. A new family room, a guest bedroom and a bathroom has been built in the basement level of his house. The county assessor increased the value of his property from $200,000 to $250,000 upon assessment. The current mill rate is 16. Since George is living on the property, he's entitled to a homestead exemption of $25,000 or 10% of the assessed value of his house.

Let's do the math:

Property Tax = ((Assessed Value - Exemptions) * Mill Rate)/1000

Property Tax = ((250,000 - 25,000) * 16)/1000

Property Tax = (225,000 * 16)/1000

Property Tax = 3,600,000/1000

George's new annual property tax is $3,600.

Challenging the Assessment

George isn't happy with his recent assessment. He believes that the county assessor overestimated the value of his basement renovation. The assessor valued the improvements at $50,000, but he only spent $30,000 on the renovation. He believes the appropriate value should be $230,000.

The first step George should take is to consult with the county property assessor who handled his case. If property owners like George can present reasonable arguments with supporting evidence, the assessor may agree to change the valuation. For example, if the assessed value is greater than the recent sales price for the property, presenting the property appraisal or the settlement statement from closing may convince the assessor that a mistake was made.

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