The government imposes property taxes on privately owned properties in the United States. The revenue from these taxes is used to help pay for local services including transportation infrastructure, snow removal, public schools, parks and recreation, and the operation of local government offices.
In general, property taxes are an “ad valorem tax,” or tax according to its value. As a result, the first step is an assessment of your property’s fair market value by your local tax assessor. This evaluation is typically done once a year and sometimes every other year. However, the frequency of assessments varies by jurisdiction.
The assessor typically assesses property by one of three methods.
The replacement method, also known as the cost method, estimates the cost of replacing the property minus depreciation.
The sales comparison, also known as the sales evaluation method, compares sales figures of similar properties. The number is adjusted based on your property ‘s unique features or lack of them. For example, if you have a swimming pool but your neighbor’s comparable home does not, your assessment will increase.
The income method, which is usually used to assess business property, is derived from an estimate of how much income you would make from the property if you rented it. This number would be adjusted to account for the costs involved to maintain the property, manage the property, and any insurance and taxes.
Next, that balance is multiplied by the nominal property tax rate, which is also known as a mill levy or millage tax. A mill rate is $0.001, or one-tenth of one cent. In other words, there is a $1.00 tax for each $1,000 of assessed property value. The taxing authority determines the mill rate for the properties in the area of each tax jurisdiction. Subsequently, the levies are added together to calculate the total mill rate for the entire region.
The assessment ratio is the percentage of the value of the property that is subject to tax. It can also be defined as the ratio of assessed value to its market value. Some counties assess property at 100% of market value.
The formula for calculating property tax is the millage tax (expressed as a percent) x the assessment ratio x the fair market value.
For example, let’s say that your property is assessed at $400,000. The mill levy is 14.5 mills or 1.45%. In this county, the assessment ratio is 60%. As a result, the “effective property tax rate” is 0.87% (1.45% x 60%). Now, we can multiply that by the fair market value. As a result, the property tax for your property is $3,480 ( $400,000 x 0.87%).