How Close Are the Tax Records to the Property Market Value?
Understanding Local Laws & Property Assessment
Each municipality has a different method of placing a tax value on properties. These values are based on numerous factors including the square footage of the home, additions made to the home and amenities included with the home. Additionally, finished basements, number of bedrooms and even curb appeal will have an impact on the valuation of a property.
In most states, assessments are done on an annual basis. One exception to this is in the state of California where the assessed value is modified only when the property is sold. This is as a result of the state adoption of Proposition 13 which prohibits a municipality from taxing property for more than 1percent of the purchase price of the home. In this case, it is reasonable that this would not change until a new price was established.
States are allowed to determine how the market value of a home is used for assessments for taxes. In New York for example, the assessed value is set at 100 percent of the fair market value. The benefits of this method of assessment are that as property values decline, tax levies also decline. While this is a positive for the homeowners, it may be challenging for the municipalities.
Those who are purchasing homes should inquire with the real estate agent to find out what the tax assessment rules are in the individual municipality where the home is located. While states like California have specific rules that apply to the entire state, some states may allow the individual counties to set the tax rates. These rates are used for the town or the county to pay off debts to the state and to run the municipality by funding schools and other public services.
Avoiding Assessment Trickery
When a property is listed for sale, the notification may state something to the effect of “buy this property for $50,000 less than assessed value”. Do not be fooled by this form of advertising as it borders on false advertisement.
Due to the fact that property assessements, fair market value and appraised value can be three different figures, these types of advertisements can lead a buyer to believe they are making a much better deal than they really are. These are the three types of values assigned to a home and what they mean to a home buyer.
Assessed value - the value of a home that is placed by the taxing authority in the municipality. This may be calculated as a portion of the appraised value or a portion of the assessed value. This value is normally changed on an annual basis and may be impacted by changes to the property including upgrades such as new landscaping, painting a home or putting an addition on the home;
Fair market value - the fair market value of a home is determined by the current real estate market. This would be the value that buyers of homes that a buyer is willing to pay for a home. This value may be determined by a number of factors including the assessed value, the strength of the current market and the quality of amenities including schools in the area;
Appraised value - the appraised value of the home is determined by a licensed real estate appraiser. This value takes into consideration several factors that impact the overall value of a home. The appraised value takes into consideration comparable homes in the neighborhood that have sold as well as the amenities of the home including recent upgrades to plumbing, electric systems and heating systems. This value may be similar to both fair market value and to the assessed value.
Before a homeowner or home buyer can determine how close are the tax records for property market value, they need to understand how the municipality assesses the property for taxation purposes. In some municipalities the assessed value is based on 100 percent of the fair market value, which may be changed annually. Some municipalities may not change the assessed value until a home is sold.
It is important that buyers understand the assessed value of a home as it will have an impact on their home buying power. The assessed value may also have serious implications regarding escrow accounts that may be required by the lender. Buyers can research the various assessment methods used by taxing authorities by reviewing the assessor links that are provided by Real Marketing.
Resources
Sources:
- Cavanaugh, Maureen; Walsh, Natalie - KPBS News: The Impact of California’s Biggest Tax Revolt
- Investopedia: Fair Market Value
- New York State Department of Taxation and Finance - FAIR ASSESSMENTS – A Guide For Property Owners
- Gassett, Bill Massachusetts Real Estate News Massachusetts Assessed Home Values Are Not The Same As Fair Market Value
Image credits:
Tax Bar freedigitalphotos.net/renjith krishnan
Property Market Value freedigitalphotos.net/renjith krishnan
