Chapter 16
It’s So Taxing: Real Estate Assessment and Taxes
IN THIS CHAPTER
Finding out who collects real estate taxes (and why)
Discovering how to calculate real estate taxes
Checking out different kinds of tax exemptions
Looking at ways to protest your tax assessment
Getting the scoop on tax liens and sales
The only sure things in life are death and taxes. I don’t know who said that, but it’s true. If you own real estate, you’ll pay taxes on it. You may pay more or less than someone who owns the same house in a different neighborhood, town, or city. You may have an exemption that reduces your payments or relieves you of payments for a while. Or you may not be able to pay your taxes and end up losing your property.
People who buy property are concerned about the taxes they pay and will ask you (if they ask nothing else) what the taxes are on the property. Buyers expect agents to know what amount of taxes is due each year on a piece of property. State exam writers expect you to know much more, like why taxes are collected, how tax rates are established, how to calculate the taxes on a particular piece of property, and how to protest tax assessments that may be unfair.
I cover these things and more in this chapter. I define some terms for you and show you a little math, but I hope this chapter doesn’t get too taxing for you. (Sorry, I couldn’t resist.)
Who Wants Your Money, and What Do They Want with It? Collecting Taxes
This morning you probably drove your car on a street to get to work, right? Call me George Jetson, but personally I’m still waiting for those flying cars they predicted everyone would be using by now. But assuming you don’t have one, you drove your car. And if you’re reading this during a school year, your kids probably went to school this morning. Now think about where your water comes from and where your sewage goes. Who gave you that parking ticket last week? Who put out the fire down the street? You and I expect the government to provide these services and facilities, don’t we? And it takes money to give everyone what they want, doesn’t it?
The kinds of services that I’m talking about generally are referred to as municipal services, and they’re provided by the town, village, or city (or municipality) and sometimes the county. The primary way the municipalities pay for these services is by collecting taxes on real estate.
Why tax property instead of something like income? Real estate is hard to hide. The value is somewhat predictable. It provides a relatively stable way to collect the money needed for all those services we want.
A word that you need to know in connection with taxes is the word levy. It just means charged against, as in, “A tax of $1,000 is levied on that property.”
Taxes on real estate are called ad valorem taxes. Ad valorem means based on the value, and it refers to the fact that the taxes charged to a property are based on the value of the property. Ad valorem taxes sometimes are called a general tax or general real estate tax. In some communities a single, or general, tax is levied, and it pays for all municipal services. In other communities where individual taxing districts are set up, a property owner may also pay separate school district taxes as well as taxes for specific services like sewers. These individual taxing districts are generally called assessing units. In some cases a property owner may pay taxes to several different assessing units either directly or through the municipality they live in.
In some communities, a property owner may have to pay four or five different taxes on the same piece of property, with each tax designated to pay for a different municipal service.
Although it’s probably not crucial for exam purposes, you may want to see whether your state uses real estate tax revenues to pay for its operations. Most states use sales and income taxes. Some states have passed laws to limit the amount of taxes a local municipality can collect or the amount tax rates can be increased from year to year. You should check to see if your state has any laws like this.
Recognizing What’s So Special about Assessments
Another kind of tax that’s levied against real estate is called a special assessment. Special assessments are taxes that are collected against a particular group of properties, rather than against all the properties in a municipality. They are used to pay for infrastructure improvements like sidewalks, drainage projects, and other types of improvements in a particular area of the community. The area of designated properties is called a special assessment district. The town, city, or county passes an ordinance or law that creates the special assessment district and designates the purpose for which the tax money will be collected.
Go Figure! Calculating Taxes Step by Step
As a tax-assessor friend of mine observes, “If you think you’re paying too much in taxes, go down the hall and complain to the mayor. But if you think the assessment on your property is too high, go see your tax assessor.” The key elements in calculating the property taxes owed on an individual piece of property are its assessed value and the tax rates. In this section, I explain terms like assessed value and assessment ratio and show you how to do the calculations that you need to be able to do for the exam. (For extra practice on tax math, see Chapter 18.) I also discuss equalization rates for figuring county taxes (a good thing to know for the exam).
Oh so valuable: Assessing property for taxes
The word assessed really means to assign or give a value to something. The assessed value is not necessarily the actual dollar value of the property. A municipality may, for example, assess property at 50 percent of its market value. Market value is the price the property would bring in a fair and open sale on the real estate market (find more about market value and appraising property in Chapter 14). The assessed value is the value of the property that is used for real estate tax purposes. The percentage that is used to calculate the assessed value is called an assessment ratio.
To find the assessed value of any given property, you simply use this formula:
Market value × assessment ratio (expressed as a decimal) = assessed value
Say that the market value of a property is $200,000. In the community that assesses at 50 percent of market value, the assessed value is $100,000.
$200,000 (market value) × 0.50 (50 percent assessment ratio) = $100,000 (assessed value)
If you take the same property in a community that assesses at 70 percent of market value, the assessed value is $140,000. And if you go to a community that assesses at 100 percent of market value, the assessed value obviously is $200,000.
To apply this fairly on a purely mechanical or mathematical basis, the key is that each municipality uses the same assessment ratio for all the properties within its jurisdiction. To fully appreciate how this works, you need to understand that the taxation of property is about equity and not objective value.
If you and I own property that has the same market value, we should be paying the same amount of taxes. And because taxes are based on assessed value, the assessed values of each of our properties should be the same. And if our properties have different market values, then the assessed values should be proportionally different, and so should our taxes. I put some numbers to this definition for you in Table 16-1, because calculating the assessed value of a property based on its market value and the assessment ratio is one of the types of calculations you may have to do on your state’s real estate exam.
In Table 16-1, Properties A and B are being assessed fairly, because each of them is being assessed at the same assessment ratio of 50 percent. Remember the assessment ratio is calculated by dividing the assessed value by the market value. For Property C to be fairly assessed, you multiply the assessment ratio times the market value.
$400,000 × 0.50 (50 percent) = $200,000 assessed value
As you see, for the assessed values to be proportionally fair, it doesn’t matter what the market values are for properties in a given municipality as long as the assessed value is calculated using the same percentage. Going one step further, as you look at the assessed values in the example, because taxes are based on assessed value, Property C will pay twice as much in taxes as Property A. And that’s fair because Property C is worth twice as much as Property A.
TABLE 16-1 Figuring Assessed Values
Property |
Market Value |
Assessed Value |
|---|---|---|
A |
$200,000 |
$100,000 |
B |
$300,000 |
$150,000 |
C |
$400,000 |
? |
There are a few places, which you’ll read about in your real estate courses, where the assessment ratios vary for different classes of property. A class of property for example, would be residential or commercial. These varying assessment ratios are more likely to be found in larger cities. Find out if any municipalities in your state use varying assessment ratios for different types or classes of property.
The numbers game: Understanding tax rates
Although calculating tax rates probably isn’t something you specifically need to know how to do for an exam, it is something you need to understand in general to answer non-math questions about the process. Knowing how to calculate taxes also isn’t a bad thing, because you probably pay property taxes and may want to know how these guys at city hall come up with their numbers.
Tax rates in a municipality are based on a calculation involving the budget needs of the community and the total assessed valuation of the community. The municipality must first arrive at a dollar amount for its annual budget, and after that figure is adopted, the municipality looks at its tax base, which is the total assessed valuation of taxable property within the community.
So how do you figure out a basic tax rate? Easy! Just remember this formula:
Municipality budget ÷ total assessed valuation = tax rate
For example, say a city has adopted a budget of $2.5 million. Its total tax base is $50.0 million. You divide the budget number by the total assessed value to come up with the tax rate. In this case
$2,500,000 ÷ $50,000,000 = $0.05
This formula translates the fact that the municipality must collect five cents for every dollar of its total assessed value. However, tax rates never are expressed in cents but rather in one of the three ways I discuss next.
Throughout the United States tax rates are reported in one of three different ways that vary by state and by municipality within the state. Using the basic tax rate that I calculated in the last paragraph, $0.05 of tax for every $1 of assessed valuation as an example, the three ways are
Mills of tax per one dollar of assessed value — 50 mills/$1.
One mill is one one-tenth of one penny, so 50 mills is $.050, which you get by dividing the number of mills, usually referred to as the mill rate or millage, by 1,000.
- Dollars of tax per hundred dollars of assessed value — $5/$100.
- Dollars of tax per thousand dollars of assessed value — $50/$1,000.
Each of these calculations is a different way of expressing the original calculation of $.05/$1.00.
Doing the decimal diddle: Calculating the taxes due
Although you may see a few questions on the exam about how taxes work, the math question you’re most likely to see on your state licensing exam is one in which you must calculate the taxes on a piece of property. The basic mathematical procedure is to multiply the assessed value by the tax rate.
Assessed value of the property × tax rate = taxes due
Because different municipalities in your state may use the three different methods, I show you three problems using mills per dollar of assessed value, dollars of tax per hundred dollars of assessed value, and dollars of tax per thousand dollars of assessed value. You need to be able to calculate taxes using all three methods.
Take note that the tax rate in the examples that follow stays the same.
When the tax rate is expressed in mills
Tax rates frequently are expressed in mills, or as a millage (a tax rate expressed in mills per dollar of valuation). As already mentioned, a mill is one-tenth of one cent ($0.001). A tax rate of five cents of taxes per dollar of value is equal to a millage of 50 mills per dollar. Conversely, and this is the more likely conversion you’ll have to make, a tax rate of 65 mills is $0.065 per dollar of assessed value.
A typical question would be to calculate taxes on a property if you’re given an assessed value and a tax rate expressed in mills. To convert the millage rate (sometimes called the mill rate) into something you can use in a calculation, just use the following formula:
Millage ÷ 1,000 = Mill rate expressed in dollars or cents of tax per dollar of assessed valuation
Suppose a property has an assessed value of $60,000 and a tax rate of 40 mills. The first step is to convert the millage into dollars. There are a couple of ways you can do this.
40 mills ÷ 1,000 = $0.040
Or convert the mills to dollars by moving the decimal point three places to the left, remembering that a decimal is always at the right end of a whole number even if it isn’t actually there.
40 mills = $0.040
Now that you’ve done the conversion, you multiply the assessed value and the millage rate (expressed in dollars).
$60,000 (assessed value) × $0.040 = $2,400 taxes
When the tax rate is expressed in dollars per hundred
Again, say that the assessed value of a property is $60,000, and the tax rate is $4 per $100. The tax rate, in other words is $4 for each $100 of assessed value (or $0.040). How much are the taxes?
Remember that you find the taxes due by multiplying the assessed value and the tax rate. The calculation is
- $60,000 (assessed value) × ($4 ÷ $100) (tax rate)
- $4 (tax rate) ÷ $100 (ratio of assessed valuation) = $0.04 tax rate (per $100 of assessed valuation)
- $60,000 assessed valuation × $0.04 tax rate = $2,400
The other way to do this by hand or by calculator is
- $60,000 (assessed value) ÷ $100 = 600
- 600 × $4 = $2,400
When the tax rate is expressed in dollars per thousand
Say the assessed value of a property is $60,000 and the tax rate is $40 per $1,000 of assessed value. What are the taxes on this property?
Again, you multiply the assessed value and the tax rate, like so:
- $60,000 (assessed value) × ($40 ÷ $1,000) (tax rate)
- $40 (tax rate) ÷ $1,000 (ratio of assessed valuation) = $0.04 tax rate (per $1.00 of assessed valuation)
- $60,000 assessed valuation × $0.04 tax rate = $2,400
Doing this problem with a calculator, you’d enter the following equations:
- $60,000 ÷ $1,000 = 60
- 60 × $40 = $2,400 taxes
A nice balance: Using equalization rates
You may have to do a problem using equalization rates, sometimes called equalization factors, to figure out a county or school district property tax (as opposed to a city, town, or village property tax), so I’ll explain what they are and how to use them. In a simple situation, several towns, cities, and villages within one county all levy their own taxes to pay for their own services, but the county also needs to collect taxes from all the residents in the county, and it may use the tax assessments from each town, village, and city. Equalization factors are needed in situations where county property taxes are being collected from several different towns, cities, and villages (municipalities) that are using different assessment ratios within that county. For example, House A in Town A has a market value of $200,000 and House B in Town B has a market value of $200,000, but Town A uses a 50 percent assessment ratio (for more about assessment ratios, see “Oh so valuable: Assessing property for taxes” earlier in this chapter), which results in an assessed value of $100,000, and Town B uses an assessment ratio of 40 percent, which results in an assessed value of $80,000. If you applied the same county tax rate to these two assessed values, House A would pay more county taxes than House B, even though they had the same market value. The equalization rate to the rescue.
The equalization rate is used to eliminate these differences and make sure people are paying their fair share of county taxes regardless of the assessment ratios their local municipalities use. Different counties may handle the math slightly differently, but the easiest way to look at this is that the equalization rate compensates for the individual municipal assessment ratios so that each property in the county is brought back up to its full market value. That value is then used for county tax calculation purposes. You need to note that although equalization rates are commonly used by counties — and that’s the example I use — they can be used by any unit of government that collects taxes from different lower level taxing units, like a regional water authority that taxes multiple counties or municipalities. In the case of a centralized school district that encompasses several municipalities, the equalization rate compensates for the different municipal assessment ratios.
To figure out the county taxes on any given piece of property, you take its assessed value and multiply it by a designated equalization rate to come up with its equalized value. (Don’t worry — you won’t be asked to calculate an equalization rate on the test.) You then multiply the property’s equalized value and the tax rate (expressed in one of the three ways discussed in “Doing the decimal diddle: Calculating the taxes due,” earlier in this chapter), and presto! You have the county taxes due. Here are two handy formulas:
- Total assessed valuation (in the municipality) × equalization rate for the county or other taxing unit = equalized value (total assessed valuation for the county or other taxing unit)
- Equalized value × tax rate for the county or other taxing unit = taxes due to the county or taxing unit
Want to see equalization rates in action? Say that Town A assesses its property at 25 percent of market value, Town B at 50 percent of market value and Town C at 80 percent of market value. (You can read about assessment ratios in “Oh so valuable: Assessing property for taxes” earlier in this chapter.) When the county applies its tax rate to all the properties in the county, properties of the same value would unfairly pay different amounts of taxes, because each house is assessed at a different percentage of market value. (Remember: Taxes are calculated against assessed value, not market value.) A $100,000 house in each of the three example towns respectively is assessed at $25,000 (Town A), $50,000 (Town B), and $80,000 (Town C). The simplest thing to do is to raise all the properties back up to their full market value and use that to calculate the taxes.
The equalization rate is based on the different assessment ratios in each town, so that taxpayers pay their fair share relative to each other. In the example that follows, all three taxpayers pay the same amount of county taxes, because all three houses have the same market value. I’ve calculated equalization rates for the assessment ratios I’m using in this example to show you how and why it works out.
- Assessed value × equalization rate = equalized value
- $25,000 × 4 = $100,000
- $50,000 × 2 = $100,000
- $80,000 × 1.25 = $100,000
Notice a few factors here:
- I’ve equalized the value up to 100 percent of market value. It doesn’t have to be 100 percent; it can be equalized to any level of value as long as all the individual assessments are equalized in the same manner.
- A different equalization rate is in effect for each property because each municipality assesses properties at a different percentage of market value.
You probably won’t have to calculate an equalization rate, but you may have to calculate taxes using an equalization rate. Here’s a sample problem. A property is assessed at $40,000. Its equalization rate for county taxes is 1.5. The county tax rate is 10 mills. What are the county taxes on the property?
- $40,000 (assessed value) × 1.5 (equalization rate) = $60,000 (equalized value)
- 10 mills (tax rate) ÷ 1,000 = $0.01 (tax rate in dollars)
- $60,000 (equalized value) × $0.01 (county tax rate) = $600 (county taxes due)
Unfortunately, I’ve seen cases in which questions about equalization rates seem to indicate a lack of understanding of equalization rates on the part of the question writer. Just in case you get a question that mentions equalization rates and doesn’t specify that it’s for a county or school district, your best bet is to use the sample calculation that I used in this section and use the equalization rate to calculate the taxes due.
Home Free (Sort of): Eyeing Property Tax Exemptions
Some properties are exempted from paying real estate taxes, and other property owners may actually pay reduced taxes for one reason or another. In this section, I tell you about the most common situations in which tax exemptions and reduced taxes are in effect. All information in this section is subject to state and local law, so you need to check to see what kinds of properties are fully or partially tax exempt in your state and what exemptions are available for certain groups of people.
A free ride: Fully tax-exempt properties
Government-owned properties, or properties owned by federal, state, county, town, city, village, township, borough, and any other level of government, are tax exempt to the extent that governments don’t pay taxes to themselves nor do they generally pay taxes to a higher or lower level of government within which the property is located, provided that the property is also located within the borders of the government that owns it. So a town not only won’t usually pay taxes to itself for a town park, but it also won’t pay real estate taxes to the county for that park. The opposite also is true. The county won’t pay taxes to the town for a county park within the town’s borders. Federal government-owned and state-owned lands likewise are exempt from paying local real estate taxes. The one exception to this exemption is where property is owned by one government and is located in a completely different governmental jurisdiction. For example, Town A owns a reservoir in Town B. Town A may very likely pay taxes to Town B. But if Towns A and B are located in the same county, neither pays county taxes on the reservoir. Likewise, if County A owns property in County B, it probably will pay taxes to County B. This may vary by state, so check it out.
Other properties that are fully tax exempt, in general, include the following:
- School districts, water districts, sewer districts, and similar public service organizations that own property
- Property owned by private educational institutions, religious organizations, hospitals, and charitable groups
Just a small piece: Partial tax exemptions
Different states have different rules and programs that may exempt a portion of property taxes. You probably won’t get a question on an exam about specific exemptions in your state, but you nevertheless need to check them out just in case.
A partial exemption may work in one of several ways: It can apply to the taxes directly by reducing the amount owed, it can apply to the assessment by reducing the assessment for an individual, or it can apply by reducing the assessment for a particular class or type of property. Here are a few examples:
- Partial relief of total taxes that have to be paid may be granted. This partial exemption usually is a percentage of the taxes due and may be offered to senior citizens or the disabled. Income qualifications may also be attached to the exemption. So a person may have to be 65 years old and making less than a certain amount of money to qualify for an exemption.
- Another type of partial tax exemption is a reduction in the assessment on the property. This type of exemption typically is offered to veterans. The exemption may be either a fixed dollar amount or a percentage of the assessment and may vary according to whether the veteran was in combat and/or is disabled. Special programs may also provide relief in the form of reduced assessments from various specific taxes such as for schools.
- Some states also provide different assessment ratios for different types of properties. I discuss assessment ratios in “Oh so valuable: Assessing property for taxes,” earlier in this chapter. For example, commercial properties may be assessed at higher assessment ratios than residential properties. What that means is that if you have a residential and a commercial property that have the same market value, the commercial property pays a higher amount of property taxes than the residential property of equal value.
Remember, when you’re an agent selling a property, you need to find out the taxes on the property as if no exemptions were applicable. Your buyer may not qualify for the same exemptions as the seller. You can find out the taxes on the property by consulting the municipal or county assessor to get the assessment information and the receiver of taxes (treasurer or department of finance) to get the tax rate. Then using the methods described earlier in “Doing the decimal diddle: Calculating the taxes due,” you can figure out the taxes.
That’s Not Right: Protesting Assessments
Remember that tax assessments are about fairness, not necessarily objective reality. If your community assesses everyone at 100 percent of their property value, then you need to be on the lookout for your property being valued at a higher value than it actually is. You can argue that your property is being over-assessed, because it isn’t really worth what the assessor says it is. (This situation is one of the few in which you ever try to make that argument.)
The other way assessments can be unfair is when properties in the same community are assessed at different percentages of their market value (also known as the assessment ratio — see “Oh so valuable: Assessing property for taxes,” earlier in this chapter). For instance, if most of the properties in town are being assessed at 50 percent of market value and yours is being assessed at 70 percent of market value, you may have a case.
All states have some method or process in place for protesting the assessment on your property. Each state may have a slightly different process. Typically, each community has some sort of review board before which you can protest your assessment, usually during a designated time of the year. If you’re still unsatisfied with the review board decision, court action usually is necessary. You may be asked a question about this process on the exam, so you may want to find out just how your state handles tax assessment reviews. At the very least, you need to find out what the local tax assessment review board, if one exists, is called in your state, county, or municipality.
Before you take your first official step toward protesting your assessment, you first need to check whatever records your local tax assessor has on your property, making sure that the description of the property upon which the assessment is based is accurate. Assessors are reasonable people, and you may find that you’re being assessed for the back porch that the last owner tore down but never reported.
Pay or Lose: Tax Liens and Sales
You can read all about liens, including tax liens, in Chapter 8. But here are a couple of points you specifically must know about tax liens.
Individual state laws dictate the details of what happens when real estate taxes go unpaid. You’re unlikely to get questions that deal with that level of detail. A number of practices are commonplace, however, and I discuss the ones that you need to be familiar with here. But just in case, you still should check out the details in your home state.
If you don’t pay your taxes, eventually the taxing authority (call it the city) can take legal action to collect them from you. The first action taken generally is the placement of a lien against the property for the unpaid taxes. A lien is a financial obligation attached to a piece of property. After that, other legal action may take place that can take one of two forms.
- Tax sale: One way for the city to collect the money you owe in taxes is to conduct a tax sale. The city sells your tax debt to someone. That person pays the city what you owe. If you don’t pay that person back, usually including some kind of interest or penalty, that person can claim ownership of the property. Before and during this action, the property owner has a right to redeem the property by paying the taxes plus any penalties or interest that apply. The right to do this before the tax sale is known as the equitable right of redemption. The right to do this after the tax sale is called the statutory right of redemption. The time frames and details of how these redemptions work are governed by individual state law. You can remember these two terms by the fact that “e” for equitable is near the front of the alphabet and the equitable right of redemption is before the sale, and that “s” for statutory is near the end of the alphabet and the statutory right of redemption is after the sale.
- Foreclosure: Another way the city can collect unpaid taxes is by foreclosing on the property, which means taking ownership of it and selling it to pay for the unpaid taxes. (For more about foreclosures, check out Chapter 15.) A term associated with foreclosure for unpaid taxes is in rem. In rem means the city takes action against the property rather than against you.
Banks that lend money for mortgages are particularly concerned about tax liens, because a tax lien takes first priority, which means it must be paid before any other liens, including the mortgage. The mortgage lender therefore is concerned that if a property must be sold for unpaid taxes, not enough money will be left from the sale to pay the balance owed on the mortgage loan. That’s the reason many banks require the homeowner to pay into a tax escrow account from which the bank pays the taxes, just to be sure they get paid. You can read more about mortgages in Chapter 15.
Review Questions and Answers
In addition to a calculation question or two, you can expect questions through which you can demonstrate your knowledge of terminology associated with taxes. Memorize all the key words and know how to calculate taxes with and without equalization rates, and you’ll do great.
1. A property is assessed at 50 percent of its market value. What is the 50 percent called?
(A) The property value ratio
(B) The assessment ratio
(C) The assessment
(D) The ad valorem tax ratio
Correct answer: (B). This is something you’ll have to memorize. With this group of choices you can at least eliminate assessment, because you know that the word percent in the question is the same as ratio in one of the answers.
2. A foreclosure for unpaid taxes against the property is called
(A) a judgment.
(B) a due on sale clause.
(C) in rem.
(D) a general lien.
Correct answer: (C). A judgment has to do with unsatisfied liens. A due on sale clause is often part of a mortgage loan agreement. A general lien is put against several properties. In rem refers to the foreclosure action against the property specifically instead of against the person.
3. While representing an owner in selling his property, you find a partial exemption of 10 percent against the assessment because the owner is a veteran. Assuming the successful buyer is not a veteran and the tax rate doesn’t change, what would the new owner’s taxes be relative to the previous owner’s tax assessment?
(A) Higher
(B) Lower
(C) The same
(D) Not enough information given to determine
Correct answer: (A). The key to answering this question is to remember that an exemption against the assessment always means a reduced assessment and therefore lower taxes. Without the exemption, the new owner’s taxes would be higher.
4. The period of time after a tax sale during which a property may be redeemed is called
(A) the statutory period of redemption.
(B) the equitable period of redemption.
(C) the in rem redemption period.
(D) the lien payment period.
Correct answer: (A). The equitable period of redemption is before the tax sale. Remember that “e” for equitable comes before “s” for statutory in the alphabet, just like equitable right of redemption comes before the tax sale and the statutory right of redemption period comes after the tax sale. The in rem redemption period and the lien payment period are made up.
5. Public improvements in a specific neighborhood often are paid for by
(A) ad valorem taxes.
(B) special assessment district taxes.
(C) a public improvement lien.
(D) the general tax.
Correct answer: (B). Don’t overthink a question like this. If you see key words like neighborhood improvements, the exam writers probably are trying to find out whether you know about special assessment districts. Although I made up the term, I imagine that some kind of lien could be placed against a specific property for an improvement benefiting only that property. The general tax essentially is the same as the ad valorem tax and wouldn’t commonly be used to improve one neighborhood.
6. A property has an assessed value of $60,000 and an equalization rate of 1.25. What is the equalized value of the property?
(A) $40,000
(B) $48,000
(C) $60,000
(D) $75,000
Correct answer: (D). This question really is pretty simple. Just multiply the assessed value by the equalization rate.
$60,000 × 1.25 = $75,000
7. A property is assessed at $50,000. The tax rate is 8 mills. What are the taxes due?
(A) $40,000
(B) $4,000
(C) $400
(D) $40
Correct answer: (C). The thing to remember when you’re working with mills is to back up the decimal by three places to the left (in other words, you divide by 1,000), and then multiply the assessed value by the millage rate.
8. A property is assessed at $76,000 and the tax rate is $5 per $100. What are the taxes?
(A) $380
(B) $3,800
(C) $1,520
(D) $152
Correct answer: (B). If you had trouble with this question, check out “Go Figure! Calculating Taxes Step by Step,” earlier in this chapter.
- $5 (tax rate per $100) ÷ $100 (of assessed valuation) = $0.05 (tax rate per dollar)
- $76,000 (assessed value) × $0.05 = $3,800 taxes owed
Alternatively, you can do it this way:
- $76,000 ÷ $100 = 760
- 760 × $5 = $3,800
One other thing: Don’t let the size of the numbers throw you. You may think $3,800 is an outrageous amount of property taxes to pay and therefore incorrect, so you pick another answer that seems to make more sense. I think $3,800 in taxes is outrageous, too. And I think so every time I pay my property tax bill, which is more than that. So learn the math and trust your skills in doing these problems.
9. A property is assessed at $44,000. The tax rate is $11 per $1,000. What are the taxes?
(A) $400
(B) $4,000
(C) $4,840
(D) $484
Correct answer: (D). This question is the same as question number eight but with a different tax rate expressed against $1,000 in assessed value.
- $11 (tax rate per $1,000) ÷ $1,000 (of assessed valuation) = $0.011 (tax rate per dollar)
- $44,000 (assessed value) × $0.011 = $484 Taxes
Alternatively, you can do it this way:
- $44,000 ÷ $1,000 = 44
- 44 × $11 = $484
10. A property’s market value is $250,000. The assessment ratio is 40 percent. The tax rate is 23 mills. What are the taxes on the property?
(A) $2,300
(B) $230
(C) $5,759
(D) $575
Correct answer: (A). This problem ties together an assessment ratio and a tax rate calculation. If you can do this one, you can probably handle any tax math problem thrown at you.
- $250,000 (market value) × 0.40 (assessment ratio) = $100,000 (assessed value)
- 23 mills (tax rate) ÷ 1,000 = 0.023
- $100,000 (assessed value) × 0.023 = $2,300