Property Tax Assessment: What It Is and What It Means

Property taxes are recurring expenses that many homeowners need to be prepared for. To determine how much you owe, your local government will conduct a property tax assessment.

What is a tax assessment?

A property tax assessment helps your county or local government determine how much your property is worth, otherwise known as the assessed value. The assessed value of the property is then multiplied by the property tax rate in your area to calculate your property tax bill.

The assessed value and appraised value of a property might sound similar, but there are notable differences between the two:

• Assessed value: The value of your home is determined by your local government and used to calculate your property taxes.
• Appraised value: Following a home appraisal, the appraiser will provide their opinion of the home’s value. This is the appraised value, and it helps lenders determine how much they’ll allow a buyer to borrow to purchase the property.

Learn More: When to Get a Refinance Home Appraisal and When to Skip

What is the difference between the tax assessment and property taxes?

Property taxes provide significant revenue for local governments. To determine your property tax bill, your local government will conduct a tax assessment.

Here’s a quick breakdown of the difference between tax assessments and property taxes:

• Tax assessment: An evaluation of your property, often conducted by a county or city assessor, to determine the property’s assessed value.
• Property taxes: What you pay based on the assessed value of your property and the property tax rate.

A portion of your monthly mortgage payment goes into an escrow account to cover property taxes and insurance premiums. Once your property tax bill is due for the year, your lender will use the funds in your escrow account to pay the bill.

Tip: Your property tax bill may increase if your tax rate or the assessed value of your property goes up.

On the other hand, if either the assessed value or property tax rate decreases while the other increases, there’s a chance you could end up paying less in taxes.

Some states also have property tax limits that protect residents from drastic increases in property values. Look into how property taxes are implemented in your area, and stay up to date on the latest changes.

Find out: How to Conduct a Property History Search Before You Buy

What determines your property tax bill?

Property taxes change based on the policies set by your county, city, and state. Similarly, the amount you pay can change based on your property tax assessment.

Some states update their assessments each year, while others might have a different schedule, such as every three years. Check with your taxing authority to find out how often assessments are made.

Here are the three factors that go into determining your property tax bill:

Your assessed property value

An assessor employed by your local government will determine your home's assessed value. When assessing your property, the assessor might look at what nearby homes have sold or been assessed for.

Exemptions you qualify for

Some taxing jurisdictions offer exemptions for portions of your home’s value. For example, Idaho offers a homeowner’s exemption if you use the home as a primary residence, and up to $100,000 of the home’s assessed value can be excluded from the tax calculation.

Other exemptions, such as for seniors or disabled veterans, might also apply.

Your property tax rate

Finally, your property tax rate is set by your local taxing authority, typically the county.

Find Out: What It Costs to Buy a Home

How property taxes are assessed

Property tax assessments are performed based on the taxing authority’s schedule. Some assessors are required to update home values by the first of the year, while others might have a two- or three-year cycle and notify homeowners at different times of the year.

There are three methods used to assess property taxes:

1. Replacement method

Sometimes referred to as the cost approach, this property tax assessment considers how much it would cost to rebuild the property based on the current market for materials and labor. Depreciation can be included, and the cost of the land is considered as well.

2. Sales comparison method

Also called the market approach, the sales comparison method looks at recent sales prices for comparable properties in your area. The features and improvements of your home are compared to what was included in recently sold homes and your value is adjusted accordingly. This is a common method used to assess residential properties.

3. Income method

Mostly used for business or commercial properties, this method looks at how much income can be expected if the property were to be rented out. The assessor also takes into consideration things like operating expenses and insurance, as well as maintenance costs and any financing terms.

The potential income and expenses are then factored together to determine the property’s value.

How to appeal your property tax assessment

If you’re not happy with your property tax assessment, you can usually file an appeal. Be sure to read your assessment letter to find out the proper steps to take.

You should also:

• Note any inaccuracies about your property, including the number of rooms or improvements that might be present.
• Gather documentation, which can include comps from real estate agents, as well as information about your property.
• Make sure you’re following proper procedures to file paperwork by deadlines and present your case.

Depending on where you live, the cost of gathering comps could be more than your property tax savings. Additionally, it’s important to consider whether appealing is worth your time and energy.

Good to know: Your appeal might only change the assessed value of your home, not the property tax rate. If the home’s value is reassessed to a lower amount, your property tax bill will decrease.

On the other hand, your appeal runs the risk of resulting in a higher assessment, which can lead to a higher tax bill.

Learn More: The Tax Benefits of Owning a Home: Must-Know Deductions and Credits

Another way to lower your housing costs

While lowering your tax bill can help you save money, there are also other ways to reduce your monthly mortgage payments. A mortgage refinance can be an easier way to save on housing per year, since you can change the terms of your loan and lock in a lower interest rate.