Property Tax 101, Pt 2 – Property Valuation

Property Tax 101, Pt 2 – Property Valuation

Published on Mar 20, 2013 by Pat Backen


Part two of the property tax primer.

Yesterday we talked about making a pie – the budgeting and levy process for government entities. Today we split up the pie – the property valuation process.

This too is very complicated, and I will again use some simple examples to illustrate. There are many, many special circumstances that affect property valuations, but I am ignoring them to provide easy to understand examples.

Property Valuations

Each year the assessor values every property in the city. This process includes using real estate sales for comparisons and assessments of a portion of the city’s property.

For simplicity, let’s assume there are only 5 homes in our example city:

Propert Valuations

Property Property Value % of total property value in city
House 1 $30,000 10.00%
House 2 $40,000 13.33%
House 3 $50,000 16.67%
House 4 $80,000 26.67%
House 5 $100,000 33.33%
Total $300,000 100.00%

As you can see, the value of each home in the city is assigned a percentage of the entire value of the taxable property in the city.

This is also pretty straightforward, at least in our example. In real life this is far more complicated, as we will see in a bit.

Property Valuations and the Levy

Property valuations and the levy are used together to calculate the amount of property tax each property owner pays.

From yesterday, the total levy (city, county and school district portions) is $3000.

To get the property tax amount, simply multiply the value of the home (as a percentage) to the total levy amount:

Property Valuations and Taxes

Property Property Value % of total value Tax Amount
House 1 $30,000 10.00% $300
House 2 $40,000 13.33% $400
House 3 $50,000 16.67% $500
House 4 $80,000 26.67% $800
House 5 $100,000 33.33% $1000
Total $300,000 100.00% $3000

Let’s go back to our pie analogy. If the total levy represents the entire pie, the property valuation represents the piece of the pie each property owner receives.

Impact of Valuation Changes

Now let’s say the owner of house 5 got a huge bonus at work, and decides to build an addition to their home. We will also assume the following year’s levy stays the same at $3000, but the property valuations look like this:

Property Valuations and Taxes

Property Property Value % of total value Tax Amount
House 1 $30,000 8.57% $257.14
House 2 $40,000 11.43% $342.86
House 3 $50,000 14.29% $428.57
House 4 $80,000 22.86% $685.71
House 5 $150,000 42.86% $1285.71
Total $300,000 100.00% $3000

There are a couple interesting things to note here. First, the total amount of money that the government asks for did not change, they got exactly $3000 both years. Second, the value of the other homes did not change, yet their taxes went down.

Since the value of House 5 grows and the others stay the same, House 5 pays an increased percentage of the total tax.

So back to our pie again. The pie is made with the same ingredients and is exactly the same size ($3000). Even though the value of House 5 is $50,000 more, the government did not get any additional tax – the pie is exactly the same each year. All that can be done is adjust the size of the portion each property pays.

This is the simplest, easiest to understand scenario. You increase the value of your home, it is worth more and your taxes go up.

But where a lot of people get tripped up is thinking that the city gets more tax money when the value of a property goes up. With this example you can see that is not the case.

My property value went down, but my taxes went up!

Let’s look at another example, a little trickier this time, and one that has been all too common the last few years.

Again the levy stays the same at $3000. The assessor looks at the value of all the properties and sees that home sale prices have been significantly less than the previous year’s prices. This lowers the value of all the homes, some more than others:

Property Valuations and Taxes

Property Year One Year Two Change
Property Property Value % of total value Property Value % of total value Value Change from Yr 1 to Yr 2
House 1 $30,000 8.57% $25,000 10.64% -16.67%
House 2 $40,000 11.43% $30,000 12.77% -25.00%
House 3 $50,000 14.29% $30,000 12.77% -40.00%
House 4 $80,000 22.86% $65,000 27.66% -18.75%
House 5 $150,000 42.86% $85,000 36.17% -15.00%
Total $300,000 100.00% $235,000 100.00% -21.67%

Here you can see the value of the homes all change, but by different percentages. The last column shows the percentage change for each home from year 1 to year 2.

Next, by comparing the percentage of total value, you can see how the pieces of the pie change from from year to year. Because House 5’s value drops by the smallest percentage, their tax actually goes up – as do Houses 1 and 4:

Property Valuations and Taxes

Property Year One Year Two
Property % of total value Tax Amount % of total value Tax Amount
House 1 10.00% $300 10.64% $319.15
House 2 13.33% $400 12.77% $382.98
House 3 16.67% $500 12.77% $382.98
House 4 26.67% $800 27.66% $829.79
House 5 33.00% $1000 36.17% $1,085.11
Total 100.00% $3000 100.00% $3000

Some property owners see a decrease in their taxes, some see an increase but the value of all them goes down. Again the government gets exactly the same amount, $3000.

Bringing it all together

There are two independent pieces that determine the amount of property tax each property owner pays.

  1. The levy is based on the needs of the city and county and voter approved levies for the school board. City and county levies are recommended by staff and elected officials with public meetings and hearings for residents to weigh in before it is set.
  2. Property values are set by the assessor, and define the value of each property in the city. There are also public hearings and meetings for property owners to discuss the value of their property. This value is used to determine the percentage of the levy each owner pays.

To help clarify, here’s an example using House 5.

The entire value of all the properties in the city ($300,000) is divided by the value of House 5 ($100,000) to get the the percentage of the levy House 5 needs to pay (33.33%)

That percentage is multiplied by the total levy to get the tax amount: 33.33% x $3000 = $1000

How Much the Government Gets

By itself, rising property values do not mean the city (or anyone else) is getting more money. The increased value is applied to the property, and other property owners tax is reduced, assuming their value did not rise. If the levy is not increased the amount of tax collected stays the same.

Real Life

In these simple examples, many complicating details are left out, but the basic theory remains the same.

In real life, budgets and levies are more complicated, and businesses have more of them in their pie (state property tax is the biggest extra “ingredient”).

As for property values, they increase and decrease at different rates across a city.

There are also many exclusions that lower a homeowner’s property value for tax calculation purposes. That adds complexity and was not included here.

You may have noticed there are no businesses or apartment buildings in our example city. That’s because both introduce yet another level of complex calculations that are beyond the scope of this post (but the underlying principle is the same). It starts to get really complicated when levy amounts and property values change. All of a sudden the pie is getting bigger and the size of the pieces are changing.

Believe it or not, levies have been very stable over the last few years. Whether it is the city or county, elected officials have been very cautious about increasing taxes, despite increases in expenditures (have you been paying more for gas or health insurance the last few years? So has the government!).

This was meant to help people get started to understand property taxes, hopefully it helped clarify the process a little bit and you are better informed. Entire industries are have been created to deal with the laws and systems for property taxes, both commercial and residential, so we just barely scratched the surface.

Next post we’ll deal with something easier, like global warming or rocket science…