How Property Taxes Work in The U.S.

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Many governments around the world levy a tax on the value of property. In the United States, some form of tax on property or land ownership has been in use since colonial times. Property tax is levied and administered at the local and sometimes state level, most commonly affecting homeowners, businesses and some other forms of property including vehicles.

Since the details of property taxation can vary from one municipality to another, they can serve as a source of confusion for some. As Bankrate pointed out, property taxes may perplex new homeowners, especially if tax rates or value assessments rise. Therefore, it’s important for tax professionals as well as taxpayers to understand the ins and outs of one of the country’s oldest, most common forms of taxation.

The point of property taxes

As explained in a brief from the Institute on Taxation and Economic Policy (ITEP), property taxes are widely considered to be “among the best options available for providing local governments with a predictable revenue stream”. Revenue from property tax is usually directed to fund public services in the area, like schools, police and fire departments, infrastructure and local government. Property taxes are nominally progressive, since they are usually designed to earn more revenue from citizens with more real property, and thus greater wealth. However, it can also be argued that property taxes are regressive, especially when they don’t include special provisions for farmers or people on a fixed income.

How it works

While some of the details can vary by location, the ITEP noted that property tax systems in the U.S. usually take the same basic form:

• First, the value of a taxpayer’s real property is calculated by determining its market value, or what the property could be expected to sell for. This is multiplied by the assessment ratio, which can be anywhere from 0 to 100 percent. While some states assess property tax at full market value, many use a ratio as low as 20 percent.
• Even in states that tax 100 percent of the property’s market value, there are still several exemptions and limits that can significantly reduce this liability. For example, most states apply a “homestead exemption,” which taxes only a portion of the value of any residence at a fixed dollar amount. This gives the taxable value of the property.
• The taxable value is then multiplied by the millage rate, which is the sum of all applicable tax rates in that particular jurisdiction. For example, a single property may be subject to a municipal tax, a county tax and a school district tax. Multiplying the taxable value by the millage rate yields the property tax before credits.
• Finally, one or more tax credits are deducted from the millage rate to give the total property tax owed. In some cases, taxpayers will need to pay the full property tax before credits, but will receive a refund for those credits later.

Property tax review and appeal

In determining the market value of a property, local officials use a variety of methods and calculations, and are always required to demonstrate exactly how they arrived at their final assessment. In fact, as U.S. News & World Report noted, property tax assessments are almost always a matter of public record, enabling a high degree of transparency into the process.

The property owner has a right to review and dispute these findings if they wish. To appeal property tax assessments, homeowners or business owners have a few options. U.S. News explained the basics of the appeal process, but noted that the details often vary on a case-by-case basis.

First, taxpayers need to take a look at the exact method the assessor used. The property report card contains this information, and can be requested from the local assessor’s office. At the same time, property owners may also speak to the assessor directly, usually by appointment. A face-to-face meeting may be the best way to clear up any confusion.

In assessing a property’s value, the assessor needs to rely on both objective, documented facts (such as the property’s size, year the home was built, improvements that were made) along with several assumptions that can be more subjective (the condition of the property, judgements related to “similar” properties, desirability of the location). It’s in these subjective attributes where owners and assessors tend to disagree. In some cases, the assessor could have made a simple error in their original report.

If the owner believes he or she can argue against one of these assumptions or findings, they can usually file for an appeal of the property’s assessed value. Initially, the assessment may go to a review board or a formal arbitration process. Depending on the jurisdiction, owners may need to exhaust all administrative forms of review before the case will go before a judge in public court.

Real estate appraisers are usually hired to determine property values prior to a sale, but most will also take on property tax appeals. Of course, appraisers will charge a fee for their services. According to U.S. News, this can either be a flat fee for simply conducting an appraisal and documenting the findings, or they might charge an hourly rate, especially if the owner asks the appraiser to argue on their behalf in court.

Whether the owner decides to hire a professional or go it alone, they need to stick to the facts in the case to increase the odds of success. Appraisers will focus on finding comparable properties in arguing against an assessment, taking into account what exactly makes them similar and how those properties were taxed or valued on the market. Again, much of this is a matter of public record, but simply sorting through this information often takes considerable time. Owners should rely on their own records as well, particularly when the value of renovations is not properly accounted for.

Property tax exemptions

Although they are not responsible for paying it directly, citizens who rent their property rather than own it usually bear some of the burden of property taxes. Unfortunately, renters do not usually have the ability to officially contest their property tax liability.

Non-profit organizations, including religious institutions, are generally exempt from property taxes, according to ITEP. There are also cases where local governments may make special accommodations for businesses in the form of property tax breaks. Local residents may protest such decisions because they consume land and resources without contributing to local funding in the same way that homeowners do. These are only a few examples of how property taxes can become a matter of serious debate at the local or even state level.

Recommended Readings:
Taxation Program Student Voices
Taxation Program Fast Facts


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