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Determining Property Tax Rates

Taxing land and land improvements, such as buildings, is one of the oldest forms of taxation in the U.S. Annual property taxes are assessed against real property, not personal property. Before income taxes and sales taxes, local governments used property taxes to finance most of their activities. Property taxes due yearly remain a major source of revenue for local governments.

Taxpayer Dollars at Work

Tax dollars help support the functions and services of taxing authorities. Real estate taxes provide funding to:

  • Counties
  • Cities/municipalities
  • Towns
  • Hospitals
  • School districts and public schools
  • Sanitation departments
  • Special districts

The above are legal government entities with elected or appointed officers who serve a distinct geographic area.

How Tax Liability Is Determined

Each tax jurisdiction, such as a county assessor's office, sets its own local property tax rate or millage rate. This rate is based on the assessed value of your property. Every tax year, property tax exemptions and/or tax credits may be available under state law or local law. Some examples of tax relief across the country include tax breaks for property owners who:

  • Live in their primary residence (homestead exemption)
  • Suffer from certain disabilities or natural disasters
  • Join abatement programs that encourage construction or new housing

Tax calculations are typically based on a percentage of the property's taxable value or appraised value. This assessment ratio hinges on the valuation of a homeowner's property. But how will the government determine what percentage to use for its tax calculation? A local taxing authority can use one of two methods to calculate the property tax rate:

  1. In the first method, the taxing authority estimates how much money it will need over a given time. Then, it divides that figure by the market value of all property within its jurisdiction. The result is the tax rate. This rate is sometimes expressed using percentages and sometimes as a dollar amount (i.e., $1 per $100 of property value). Example: A county government estimates it needs $1 million annually to operate and provide services to residents. The value of all property in the county is estimated to be $100 million. The county government sets the tax rate at 1%, and you will pay 1% of your home value as property tax.
  2. The second involves changing the amount spent rather than the tax rate. Using this method, the taxing authority estimates the amount of taxes available from all property tax levied at a specific rate. The taxing authority will then either increase or decrease its budget based on increases or decreases in the total value of the property's taxable or assessed value. Example: A county collects a 1% property tax. It estimates that doing so will lead to $1 million in revenue for the county based on the value of all property within its jurisdiction. The county, therefore, adjusts its budget to $1 million.

In some jurisdictions, there may also be supplemental assessments based on:

  • Voter-approved debt rates
  • Parcel taxes
  • Special tax-assessment districts, like Mello-Roos districts in California

All of these additions would be rolled into the overall property tax bill.

Types of Property Tax Limitations

State constitutions or statutes commonly impose rate increase limitations. For example, in California, Proposition 13 limits how much real estate taxes can increase per year. Many states also set a maximum rate for each class of government. Limits can be set for specific government programs, institutions, and territories, such as:

  • Schools and community colleges
  • Police departments and libraries
  • City and county operating budgets

Because property can be located in overlapping tax districts (e.g., schools and towns), total tax rates can vary from one neighborhood to another. This can also result in more than one local taxing authority calculating tax rates for a property. Many jurisdictions aggregate these rates into a single tax levy called a "consolidated," "overall," or "composite" levy.

Consult a Lawyer

If you are facing real property tax issues, talk with a real estate attorney or tax lawyer. They may be able to help you find tax breaks and ensure you're not overpaying.

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