Property Tax

How Property Taxes are Calculated

By August 1, 2019 No Comments
how are property taxes calculated

Whether you own a residential property, commercial property, or both, there’s one compulsory expense you will always have to budget for: property tax. While you’re undoubtedly familiar with paying it, you might be left wondering how property taxes are calculated. Understanding how property taxes are determined allows you to recognize when you’re paying too much — and what to do about it. 

Here’s how this ad valorem tax is calculated and what to do if you think your property has been assessed incorrectly. 

How are property taxes calculated?

Property tax, called an ad valorem or value tax, is calculated based on the value of the property. The cost of property taxes varies from state to state and is dependent upon several factors including assessed land value, structures on the property, improvements made to the land and/or structures, and the local government’s tax rate. 

Every one to five years, tax assessors will value the property and bill the owner a rate that follows the standards set by the taxing authority. Your assessment determines your tax bill, which states how much you owe for the year. 

When it comes to the actual calculations, local governments typically use something known as the income and expense form, which is sent to commercial property owners and used to help determine the value of their investment.

The Income and Expense Form

According to Nolo.com, the income and expense form requests commercial property owners to provide details on all of the rents received (income) and expenses incurred in the past year. The form requires owners to categorize rental income and provide information on the purchase history and any changes made to the property. These details are then used to determine if the property value has changed since its last assessment.

On the expense portion of the form, property owners should cite any expenses including management fees, advertising costs, legal fees, repairs and maintenance, and anything else related to the upkeep of the property. This section is especially important because it can help you avoid a sky-high property tax bill. 

Important Calculations

Assessors often use a cap rate to help determine value. Nolo gives the following example: 

“Say your property is a “class A” office building in an area with an 8% cap rate. If your net income last year was $100,000, then the assessed value of your property using the market’s cap rate of 8% is calculated as follows: $100,000/.08(cap rate) = $1,250,000.”

Then, to calculate the expected tax for the year, the following example demonstrates the formula:

“If the town your property operates in has a $12 tax rate for every $1,000 in assessed value, the taxes you would expect to pay would be determined as follows: $1,250,000/$1,000 = $1,250. Then: $1,250 * $12 = $15,000 in expected taxes.”

Appealing Your Property Tax

Despite careful reviews and calculations by assessors, it’s not uncommon for a commercial property to be overassessed. That’s why it’s essential to review your annual tax assessment and property tax bill carefully and take note of any significant year-over-year changes. If the numbers seem to increase significantly, you could have grounds to file a property tax appeal

Not sure where to start? MountainSeed’s Property Tax Appeal Services can guide you — risk-free — through the process with the ultimate goal of lowering operating costs on your commercial real estate assets. We’ll file your appeal documents, make case preparations, and represent you before any informal or formal administrative panels or boards. To ensure your property is being assessed correctly, talk to one of our experts today.