Transcript CHAPTER 2 BASIC VALUATION CONCEPTS

REAL PROPERTY TAXATION
LEARNING OBJECTIVES
 Determine a community’s tax rate, given a budget,
other income, total assessed values, and the value of
exempt properties.
 Explain why real property cannot be taxed by the
federal government.
 Determine the property tax liability and the
effective tax rate for an individual property.
REAL PROPERTY
TAXATION
LEARNING OBJECTIVES
 List four reasons why the property tax is
considered an efficient tax.
 List three criteria for evaluating the fairness
of property tax.
 Determine the average tax burden by
evaluating the sale prices of several properties.
THE TAX ON REAL PROPERTY
 The largest single source of revenue for most
local governments.
 Taxes are levied ad valorem (i.e., according to
value).
 Unlike many countries, the U.S.. Constitution
prohibits a federal property tax.
PROPERTY TAX
MECHANICS
 Each parcel is periodically appraised and an
assessed value placed on it.
 The taxable value is the assessed value, less any
exemptions.
 The tax base is the aggregate taxable value of all
properties in a community.
 The tax rate is generally stated as a millage rate
(tax dollar / $1,000 of value).
Basic Formula for
Determining the Tax Rate
RT = (EB - IO) / (VT - VX)
where RT
EB
IO
VT
and
VX
= tax rate,
= budgeted expeditures,
= income from other sources,
= total assessed value of all properties,
= value of exempt properties.
Tax-Exempt Properties
 Government-owned Properties
 Schools
 Hospitals
 Places of Worship
Partial Exemptions
 Homestead Exemptions
 Agricultural Property Exemptions
 Senior- and Disabled-owned Property
Exemptions
Calculating Tax Liability
Market Value
Assessed Value
$ 139,500
125,550
(90% of MV assumed)
less: Homestead Exemption
Taxable Value
25,000
$ 100,550
If tax rate is 22.65 mills, then tax is
22.64 x 100.55 = $2,276.45
The Effective Tax Rate
 The effective tax rate is the tax paid divided by
the property’s market value.
 Solution using previous slide’s data is:
$2,276.45 / 125,550 = 1.813%
Tax Burden Analysis
Comparable
A
B
D
Tax Liability, 1997
$1,000
$ 975
$1,050
Recent sale price
92,500 112,000 98,000
105,000
Effective tax rate
1.08%
Mean effective tax rate = 1.03%
$1,150
C
1.03% 0.99%
1.00%
Special Assessments
 Special assessments are taxes charged to
property owners to pay for local improvements
that directly benefit a parcel.
 not assessed according to the value of the
property
 generally a one-time charge
 Special taxing districts (i.e., downtown
redevelopment area).
Nonpayment of Property Taxes
 Equity of Redemption
 If taxes are in default, the property may be
foreclosed and sold at a public auction.
 Statutory Redemption Period
 Tax Certificates
TAX EVALUATION
CRITERION: EFFICIENCY
 Costs and Benefits on Market Operations
 Property Value Effects
 New Construction and Maintenance Effects
 Land Development Effects
TAX EVALUATION CRITERION: EQUITY
 Horizontal and Vertical Equity
 Regressive Nature
 Relationship to “Ability to Pay”
 Variation by Location