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Insights July 17, 2022

Understanding Property Taxes

Part One

Key Takeaways

  • Property taxes are levied by local jurisdictions towards a property and are typically Ad-Valorem, meaning they are based on the property value
  • The exact details of property tax policy can differ significantly from jurisdiction to jurisdiction
  • The property tax rate is known as a “Millage Rate” or Mill Levy and represents how many dollars are owed in tax for every $1,000 of assessed property value. This is often converted into a percentage when underwriting
  • Other factors, such as abatements, differences in the assessment rate, and additional taxes could potentially change how much a person owes in property taxes

What are Property Taxes?

Property taxes are taxes levied on a property and paid by the owner, often an individual or corporation, to a governing authority that holds jurisdiction over where the property is located. In the United States, this authority is some type of local body, such as a municipal government or school district.

Most property taxes are Ad-Valorem, meaning that the amount of tax paid is based on the value of the property being taxed. This includes the value of the land owned and sometimes even applies to tangible personal property, such as boats, cars, and trailers.

How Property Taxes are Determined

The exact details of how property tax is calculated vary from area to area, but most jurisdictions follow the same general process. A local government will have an assessor find the assessed value of the properties within their jurisdiction and add them together. This assessed value is a percentage of the fair market value of the property. The local government will then take the total amount in property taxes they wish to raise and divide it by this figure. The end result is then multiplied by 1,000 to reach what is called a “Millage Rate” (or Mill Levy). The Millage Rate is multiplied by the final assessed value of the property in order to determine the amount of property tax owed on an individual property.

Property Tax Amount Budgeted/Total Assessed Value of Properties * 1,000 = Millage Rate

Calculating Tax Using the Millage Rate

The term "millage" is derived from a Latin word millesimum, meaning thousandth, with 1 Mill being equal to 1/1000th of a currency unit.

The Millage Rate represents the amount of tax owed on a property per $1,000 of the assessed value of that property. For example, if a jurisdiction’s Millage Rate is 1 and the assessed value of your property is $1,000, then the amount in property taxes owed to that jurisdiction is $1. 1 Mill can also be thought of as a tax rate of 0.1%, and this is often used for the sake of calculations and financial modeling in the underwriting process.

Because local governments often have overlapping jurisdictions, the Millage Rate for each governing body in a region added together to reach a total Millage Rate. This rate can then be applied to an individual property in that region to calculate property tax owed.

(Millage Rate/1,000) * Assessed Value = Property Tax Owed

"The Millage Rate is multiplied by the final assessed value of the property in order to determine the amount of property tax owed on an individual property."

To put it all together, let’s look at the following example:

If a school district wants to raise $1,000,000 in property taxes and has $100,000,000 in total assessed value of property in its jurisdiction, then the Millage Rate for that school district is 10.

If the municipal government also wants to raise $1,000,000 in tax and has $400,000,000 in total assessed value of property in its jurisdiction, then the Millage Rate for that municipal government is 2.5.

The total Millage Rate for a property that is in the jurisdiction of both the school district and municipal government is therefore 12.5 Mills, or a rate of 1.25%.

If your property has a fair market value of $600,000, and the assessor’s office policy that a property's assessed value is 50% of its fair market value, then you would have an assessed value of $300,000.

Your total property tax owed would then be 300,000 * 1.25% = $3,750.

Additional Considerations

Property taxes are set by localities, and as a result, there might be other factors that could increase or decrease the total amount of tax you pay on your property.

Tax Abatements: Property tax abatements are temporary reductions in property taxes offered by some jurisdictions. They are usually conditional and designed to encourage local investment, new multifamily purchases, and/or improvements to a property.

Assessment Rate: As mentioned earlier, the assessed value of a property is a percentage of the fair market value set by a tax official. This percentage varies from area to area and can be anywhere up to 100% in California to 10% in Mississippi. Changes to this percentage may also occur and could have a considerable impact on your tax bill.

Additional Taxes: Some jurisdictions may have additional taxes on a property not included in the Millage Rate. These are often temporary and usually occur to fund special projects and initiatives. Most additional taxes are ​​also non Ad-Valorem, meaning they are not based on or correlated to the property’s value.

Property taxes are one of the biggest expense items in multifamily commercial real estate. At the same time, the details of property tax policy can vary significantly depending on where your property is located. The amount a person pays in taxes could be changed by fluctuations in the millage rate, the assessment rate, the assessed value of their property, and other factors such as abatements. These are all reasons why multifamily underwriters tend to give special attention to property taxes and closely follow local developments.

David Allen

David is an analyst at SeeCares. He researches and analyzes CRE data on a local, regional, and national level. He closely follows market trends and evaluates the conditions in the commercial real estate industry.

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