The Real Estate Encyclopedia
What Are Property Taxes?
Category - Home Buying Questions - Buying Legal & Closing FAQ's

Property taxes are considered ad valorem taxes and, therefore, are driven by the value of oneís property - the more valuable the property, the higher the tax and vice versa.  Property taxes represent the largest source of income in the United States for local governments.  Schools, parks, recreation areas, fire and police stations, local welfare programs, street maintenance, public libraries and public hospitals among others are all supported by property taxes paid by property owners. 


Property taxes are determined by a local governmentís budget preparation.  Thus, in order for the local government to determine the property taxes, Step 1 is budget preparation and appropriation. Step 2 is the appraisal of all taxable property within a particular district and Step 3 is to allocate the amount to be collected amongst all taxable properties in a particular district. 


In order to valuate taxable property (see Step 2), a county or state assessorís office appraises each taxable parcel of land and any improvements on this property.  Some states outsource this responsibility to private appraisal companies.  Appraisal procedures vary from state to state.  In some, the appraised value is the estimated fair market value or cash price a buyer would be willing to pay for that property.  Other states begin with the value of the land and add the cost of replacing any buildings or structures plus any improvements, minus an allowance for depreciation due to wear and tear.  The appraised value of the property is converted to an assessed value on which the taxes are based.  In some states, the assessed value is equal to the appraised value while in others the assessed value is a percentage of the appraised value.  As an example, in Georgia the assessed value is 40% of the appraised value. 


In order to calculate the tax rate, the assessed value of all properties is added together.  For example, if the tax district has budgeted $800,000 for the coming year and the assessed value of all the properties in that district add up to $20,000,000, by dividing $800,000 into $20,000,000, you will find that the district will need to collect a tax of 4 cents for every dollar of assessed valuation.  The taxation can be expressed three ways:  1) as a mill rate, 2) as dollars per hundred or 3) as dollars per thousand. 

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