Property Tax

Property taxes can be one of the largest expense categories for income-producing property. Local taxing authorities impose property taxes to pay for local governmentservices, and property owners pay them regularly. Taxes are one of the very few liens
that have priority over mortgages. In case of default, taxes are usually paid first, then the mortgage. (In some areas, water and sewer payments take priority over mortgages in the lien hierarchy.) In many states, property taxes are the single largest operating expense.

Local governments collect property taxes. In most areas of the country, property taxes are paid on the assessed value of real estate multiplied by a local rate. Real estate managers can appeal the assessed value of the property based on market
conditions and trends; the local rate, however, is set by the local government and is not negotiable.

Real estate managers should routinely examine how taxing bodies assess and value the property. While taxes often seem inexorable, there is some leeway with property taxes. A real estate manager’s area of expertise is knowing the selling prices of properties in the area. This information aids in determining whether a property has been fairly appraised for tax purposes.

Differing “Values”
With real estate properties, three types of “values” must be distinguished:

• Market value
• Assessed value
• Taxable value

Market value is the estimate of the most likely price that a seller can xpect to command for a property from a typical buyer under normal conditions.

Assessed value is the value of real property established by the local authority as the basis for taxation. The tax rate is applied to the assessed (or taxable) value to determine the amount of real estate tax.

The final taxable value may be different than the assessed value in certain jurisdictions. Some states have an assessed value, and then take a percentage of that amount as the taxable value. For example, taxable value may be set at 80% of the
assessed value for residential properties and 85% for commercial properties.

Some jurisdictions may allow certain exemptions to be claimed against assessed value that will reduce the final taxable value. For example, a residential homestead may be allowed a $25,000 exemption, people over 65 might be allowed an additional $15,000 exemption, and a disabled veteran might receive an additional $10,000 allowance. Thus, if a 65-year-old disabled veteran lived in his home that was assessed at $200,000, his taxable value would be reduced to $150,000, and he would be billed the same amount of taxes as the owner of a property valued at $150,000 with no exemptions.