Basics[edit]

Most jurisdictions below the state level in the United States impose a tax on interests in real property (land, buildings, and permanent improvements) that are considered under state law to be ownership interests.[3] Rules vary widely by jurisdiction.[4] However, certain features are nearly universal. Some jurisdictions also tax some types of business personal property, particularly inventory and equipment.[5] States generally do not impose property taxes.[6]

Many overlapping jurisdictions may have authority to tax the same property.[7] These include counties or parishes, cities and/or towns, school districts, utility districts, and special taxing authorities which vary by state. Few states impose a tax on the value of property. The tax is based on fair market value of the subject property, and generally attaches to the property on a specific date. The owner of the property on that date is liable for the tax.[8]

The amount of tax is determined annually based on market value of each property on a particular date,[9] and most jurisdictions require redeterminations of value periodically. The tax is computed as the determined market value times an assessment ratio times the tax rate.[10] Assessment ratios and tax rates vary among jurisdictions, and may vary by type of property within a jurisdiction.[11] Most jurisdictions' legislative bodies determine their assessment ratios and tax rates, though some states impose constraints on such determinations.

Tax assessors for taxing jurisdictions determine property values in a variety of ways, but are generally required to base such determinations on fair market value.[12] Fair market value is that price for a willing and informed seller would sell the property to a willing and informed buyer, neither being under any compulsion to act. Where a property has recently been sold between unrelated sellers, such sale establishes fair market value. In other (i.e., most) cases, the value must be estimated. Common estimation techniques include the comparable sales method, the depreciated cost method, and an income method approach. Property owners may also declare a value, which is subject to change by the tax assessor.

Once value is determined, the assessor typically notifies the last known property owner of the value determination. Such notices may include the calculated amount of tax. The property owner may then contest the value.[13] Property values are generally subject to review by a board of review or similar body, before which a property owner may contest determinations.[14]

After values are settled, property tax bills or notices are sent to property owners.[15] Payment times and terms vary widely. If a property owner fails to pay the tax, the taxing jurisdiction has various remedies for collection, in many cases including seizure and sale of the property. Property taxes constitute a lien on the property to which transferees are also subject.

Property subject to tax


Nearly all property tax imposing jurisdictions tax real property.[16] This includes land, buildings, and all improvements (often called fixtures) that cannot be removed without damage to the property.[17] Taxed property includes homes, farms, business premises, and most other real property. Many jurisdictions also tax certain types of other property used in a business. Property existing and located in the jurisdiction on a particular date is subject to this tax. This date is often January 1 of each year, but varies among jurisdictions. Property owned by educational, charitable, and religious organizations is usually exempt.[18]

Tax rates

Tax rates vary widely among jurisdictions.[19] They are generally set by the taxing jurisdiction's governing body.[20] The method of determining the rate varies widely, but may be constrained under laws of particular states. In some jurisdictions, property is taxed based on its classification. Classification is the grouping of properties based on similar use. Examples of classification are residential, commercial, industrial, vacant, and blighted real property. Property classification are used to tax properties at different rates and for different public policy purposes. In Washington D.C. for instance property occupancy is incentivized by taxing residential property at 0.85 percent of assessed value but vacant residential property at 5 percent of assessed value.[21]

Rate or millage


The rate of tax is a percentage of the assessed value of the property subject to tax. This in some cases is expressed as a “millage” or dollars of tax per thousand dollars of assessed value.[22]

Assessment ratio


Most jurisdictions impose the tax on some stated portion of fair market value, referred to as an assessment ratio.[23] This ratio may vary depending on the type or use of the property. The assessment ratio can, in many jurisdictions, be changed from year to year by the taxing jurisdiction's governing body. Changes in tax rate or assessment ratio may have the same practical effect of changing net tax due on a particular property.

Valuation


Determining the value of property is a critical aspect of property taxation, as such value determines the amount of tax due. Various techniques may be used to determine value. Except in the case of property recently sold, valuation has some inherently subjective aspects. Values may change over time, and many states require taxing jurisdictions to redetermine values every three or four years. The value of property is often determined based on current use of the property, rather than potential uses.[24] Property values are determined at a particular valuation date for each jurisdiction, which varies widely.

Valuation

Determining the value of property is a critical aspect of property taxation, as such value determines the amount of tax due. Various techniques may be used to determine value. Except in the case of property recently sold, valuation has some inherently subjective aspects. Values may change over time, and many states require taxing jurisdictions to redetermine values every three or four years. The value of property is often determined based on current use of the property, rather than potential uses.[24] Property values are determined at a particular valuation date for each jurisdiction, which varies widely.

Who determines value


Property owners may make a declaration of the value of property they own to a taxing authority. This is often referred to as rendition.[25] The taxing authority may accept this value or make its own determination of value. The value determinations are generally made by a tax assessor for the taxing authority. Some states require uniform values to be determined for each particular property.

Market value


Property values are generally based on fair market value of the property on the valuation date. Fair market value has been defined as that price a willing and informed purchaser would pay to an unrelated willing and informed seller where neither party is under compulsion to act. Sale of the particular property between unrelated persons generally conclusively establishes fair market value on the date of sale. Thus, a recent sale of the same property provides good evidence of market value. Where there has been no recent sale, other techniques must be used to determine market value.

Assessed value


Many jurisdictions impose tax on a value that is only a portion of market value. This assessed value is the market value times an assessment ratio.[26] Assessment ratios are often set by local taxing jurisdictions. However, some states impose constraints on the assessment ratios used by taxing jurisdictions within the state.[26]Some such restrictions vary by type or use of property, and may vary by jurisdiction within the state. Some states impose restrictions on the rate at which assessed value may increase.[27]

Equalization among jurisdictions

Many states require that multiple jurisdictions taxing the same property must use the same market value.[28] Generally, such state provides a board of equalizationor similar body to determine values in cases of disputes between jurisdictions.[29]

Valuation techniques


Tax assessors may use a variety of techniques for determining the value of property that was not recently sold.[24] Determining which technique to use and how to apply it inherently involves judgment.

Comparable sales

Values may be determined based on recent sales of comparable property.[30] The value of most homes is usually determined based on sales of comparable homes in the immediate area. Valuation adjustments may be necessary to achieve comparability. Among the factors considered in determining if a property is comparable are:

• Nature of the property (house, office building, bare land, etc.)
• Location
• Size
• Use of the property (residential, commercial, farm, etc.)
• Nature of improvements
  • Types and uses of buildings
  • Features of the buildings (number of bedrooms, level of amenities, etc.)
  • Age of improvements
    
• Desirability of the property (view, proximity to schools, type of access, nearby detracting features, etc.)
• Restrictions on the property (easements, building code restrictions, physical restrictions, etc.)
• Utility of the property (fertility of land, drainage or lack thereof, environmental issues, etc.)
• General economic conditions
  

Cost

Where recent comparable property sales are not available, a cost based approach may be used. In this approach, the original or replacement cost of a property is reduced by an allowance for decline in value (depreciation) of improvements.[26] In some jurisdictions, the amount of depreciation may be limited by statute. Where original cost is used, it may be adjusted for inflation or increases or decreases in cost of constructing improvements. Replacement cost may be determined by estimates of construction costs.


Income


An alternative valuation may be used for income producing property based on economic concepts. Using the income approach, value is determined based on present values expected income streams from the property.[26] Selection of an appropriate discount rate in determining present values is a key judgmental factor influencing valuation under this approach.

Special use values

Most taxing jurisdictions provide that property used in any of several manners is subject to special valuation procedures.[31] This is commonly applied to property used for farming, forestry, or other uses common in the jurisdiction. Some jurisdictions value property at its "highest and best use", with some of these providing exceptions for homes or agricultural land.[32] Special valuation issues vary widely among jurisdictions.

Revaluation

All taxing jurisdictions recognize that values of property may change over time. Thus, values must be redetermined periodically. Many states and localities require that the value of property be redetermined at three or four year intervals.[33] Such revaluation may follow valuation principles above, or may use mass valuation techniques.


Limits on increases


Some jurisdictions have set limits on how much property values may be increased from year to year for property tax purposes.[34] These limits may be applied yearly or cumulatively, depending on the jurisdiction's rules.

Assessment process

The assessment process varies widely by jurisdiction as to procedure and timing. In many states, the process of assessment and collection may be viewed as a two-year process, where values are determined in the first year and tax assessed and paid in the second.[35] Most jurisdictions encourage property owners to declare the value of their property at the start of the assessment process. Property owners in all jurisdictions are given rights to appeal taxing authority determinations, but such rights vary widely.


Valuation by assessor

Jurisdictions imposing property tax uniformly charge some official with determining value of property subject to tax by the jurisdiction.[36] This official may be an employee or contractor to the taxing government, and is generally referred to as the tax assessor in most jurisdictions. Some taxing jurisdictions may share a common tax assessor for some or all property within the jurisdictions, especially when the jurisdictions overlap.

Tax assessors must first determine what property is subject to tax, compiling lists or rolls of such property. In many jurisdictions, the tax assessor notifies the last known owner of each property that the property is subject to tax. The tax assessor must determine the value of each property subject to tax. Often, the value used is the value from the previous assessment, possibly increased or decreased by a factor determined by the tax assessor.