Ownership of real property creates a whole new set of challenges for your financial life. That includes property taxes. Your monthly mortgage payments typically include an escrow payment for property taxes, or the tax office bills you directly. State laws regulate tax assessments and how often taxing districts update tax rolls. Assessed value and tax rates are variables adjusted yearly in some states, according to an article in The Orange County Register. Understanding the difference between fair market value, assessed value and taxable value helps you get a grip on your real estate tax calculations.
Fair Market Value
A real estate appraiser considers recent comparable sales to help determine fair market value, and restricts the appraisal to a single property on a specific date. The fair market value is the price the property would sell for with a willing buyer and seller under normal conditions. A foreclosure — where the lender takes the property and sells it at auction — is a circumstance when the sale price isn’t fair market value. If you’ve recently purchased the real estate, the taxing district may change the earlier assessed value to the sale price before it calculates your property taxes.
Taxing districts employ real estate appraisers that study the economic changes in the area and increase or decrease the assessed values of an entire area by a percentage, subject to limitations. The industry calls this calculation a blanket or mass appraisal and the result isn't the same as the fair market value appraisal. The taxing district uses this assessed value to calculate the taxable value based on the state law, tax districts and limitations.
States usually restrict the amount property taxes can increase each year, referred to as a “cap” in some states. Some states also limit total increases for three or five years. Your taxing district may calculate an assessed value that is above the cap. When that occurs, the taxing unit can raise your taxes only to the cap set by the state, but may carry over the tax increase in future years until you’re paying the new rate. A cap usually doesn’t apply once the property changes hands, giving the taxing district freedom to increase taxes on new property owners.
You get a tax break on property in some states. The taxing district calculates taxable value by applying the state law to the assessed value. For example, Iowa taxes 100 percent of fair market value and Louisiana taxes 10 percent of fair market value, according to the Retirement Living Information Center. Many states have a homestead exemption for taxpayers living on the property; some states have veteran’s exemptions, disabled veterans exemptions, exemptions for seniors or exemptions for taxpayers on low-income government assistance programs. The assessor’s office subtracts qualifying exemptions from the assessed value. After subtracting all exemptions available to the property owner, the tax office compares the remaining figure with any limitations or caps. The office makes adjustments to apply the cap to the assessed value and arrives at the taxable value. Taxable value calculations consider exemptions and can’t exceed the capped value.
Linda Richard has been a legal writer and antiques appraiser for more than 25 years, and has been writing online for more than 12 years. Richard holds a bachelor's degree in English and business administration. She has operated a small business for more than 20 years. She and her husband enjoy remodeling old houses and are currently working on a 1970s home.