How Are Property Taxes Calculated? (4 Things To Know)


If you are trying to figure out how your property taxes are calculated, there are a few things to know.  For example, you need to know the tax rates in your town and also the town’s assessed value of your property.

So, how are property taxes calculated?  Property taxes are calculated by multiplying the tax rate by the assessed property value. An abatement adjusts the assessed property value, reducing the tax owed. An exemption adjusts the amount of tax owed. Residential and business tax rates may differ in a given town, city, or county.

Of course, there are lots of reasons that you might receive an abatement or exemption, which can reduce the amount of tax owed on a property.

In this article, we’ll talk about how property taxes are calculated and give some examples to make the concept clear.  We’ll also talk about abatements and exemptions and how they factor in to the calculation of property tax.

Let’s get started.

How Are Property Taxes Calculated?

At a basic level, calculating property taxes is not too difficult.  We can use the following formula:

  • (Property Tax) = (Assessed Property Value)*(Tax Rate)
house interior kitchen
The property tax owed is the assessed property value multiplied by the tax rate. Assessed value depends on the quality of the finish, among other factors.

However, things can become a little more complicated, depending on factors such as:

  • Abatements – these can reduce property value and thus tax owed.
  • Mixed Use Properties – these can affect tax owed in towns where residential and business tax rates are different.
  • Exemptions – these can directly reduce the amount of tax owed on a property.

Let’s list out all of the steps for calculating property taxes so that we don’t miss any of the factors listed above:

Quadratic functions at http://www.a...
Quadratic functions at http://www.analyzemath.com
  • Step 1: Find the assessed property value.
  • Step 2: Apply abatements to assessed property value.
  • Step 3: Find the applicable tax rate(s).
  • Step 4: Calculate tax owed (using results of Steps 2 & 3).
  • Step 5: Apply exemptions to tax owed.

Step 1: Find The Assessed Property Value

This is probably the most labor-intensive part of an Assessor’s job.  The town is required to value all property in the town for tax purposes (since real estate tax is ad valorem, or based on value).

The value of a property depends on various factors, including:

  • Type of House (Colonial, Ranch, etc.)
  • Area (square feet of living space)
  • Quality Of Finish
  • Number Of Bedrooms & Bathrooms
  • Additional Factors (pool, garage, shed, etc.)
pool
A pool can make a home more enjoyable, but it can also increase the assessed property value, leading to higher taxes.

There are three basic methods for valuing a property:

  • 1. Sales Comparison Method – this involves looking at the price that similar properties would fetch on the free market.  A “similar” property is close to the assessed property on the factors listed above, such as type of house, number of bedrooms, etc.  This method may not work well for “unique” properties, since there are typically no similar or comparable properties nearby.
  • 2. Cost Method – this involves finding out how much it would cost to rebuild the property from scratch, then adding in the cost of the land.  This method can fluctuate with the price of building materials (such as lumber) and the cost of vacant land.
  • 3. Income Method – this involves finding the profit that a property could generate (rental income minus expenses) and then multiplying by a factor based on interest rates.  For example, an assumed rate of 5% would mean a factor of 20 (5% is 0.05, and 1 / 0.05 = 20).  So, an annual profit of $25,000 times a factor of 20 would mean a $500,000 value for the property.

Often, the sales comparison method is used for valuing a home. The income method may be used to value an investment property (such as a multifamily residential building for rental).

The cost method can be used as a method to validate the other two methods, in case of any uncertainty (for example, when valuing a unique property).

Step 2: Apply Abatements To Assessed Property Value

An abatement is an adjustment to the value of a property.  This can happen in several circumstances:

  • There is an error in the database (incorrect information was entered).
  • The property has been updated or improved (an addition to increase the area of the home, a new garage or shed, removal of a pool, etc.)
  • The property has changed substantially (for example, a 4-bedroom house is destroyed in a fire and rebuilt as a 2-bedroom house).

As an example, let’s say that your home was valued at $400,000, including a pool valued at $20,000.  If you remove the pool, you can apply for an abatement to reduce the assessed property value by $20,000 (the value of the pool) from $400,000 to $380,000.

This would save you $20,000 / $400,000 = 1 / 20 or 5% on your property tax bill!

Note that an abatement can decrease or increase the value of your property.  For example, let’s say a “house flipper” buys a property and improves the kitchen without a permit.

If you buy the property and ask the Assessor for an abatement, he may value the house higher than before due to the new kitchen that is now taken into account!

So, be careful what you wish for if you ask the Assessor for an abatement.

Step 3: Find The Applicable Tax Rate(s)

Tax rates within a state can vary quite a bit between different towns and cities.  Sometimes, property tax rates are at the county level.

Even within a town or city, there can be different tax rates for different property types, such as:

  • Residential
  • Commercial
  • Industrial
  • Personal Property
  • Open Space
office commercial property
The property tax rate for a commercial space (such as an office building) may be different from the property tax rate for a residential building.

If you are trying to calculate taxes on a residential building, all you need is the residential tax rate and the property value.

If you are trying to calculate taxes on a mixed-use property (part residential, part business), then you need:

  • Residential Tax Rate
  • Business Tax Rate (commercial or industrial)
  • Breakout of Property Value (residential value vs. business value)

The tax rate is often expressed as a “mill rate”.  This just means that amount of tax per $1,000 dollars of property value (mill or milli represents 1000).

For example, the residential tax rate (mill rate) might be $23.59 per $1,000 of property value.  As a percentage, this would mean $23.59 / $1,000 = 2.359% of the property value.

Step 4: Calculate Tax Owed

Once you have the property value and the tax rate, you can calculate the tax owed on the property.  As mentioned earlier, the formula is straightforward for most properties:

  • (Property Tax) = (Assessed Property Value)*(Tax Rate)

The exception is mixed-use properties, which require a little more work.  However, there are examples given later in this article.

Step 5: Apply Exemptions to Tax Owed

After calculating the tax owed, we subtract any exemption amounts directly from the tax owed.

So, if you would have owed $4,000, but you have an exemption for $500, then you really only owe $3,500 for the year.

Let’s take a look at some examples to see how these steps come into play.

Example 1: Property Tax Owed (No Abatements Or Exemptions)

Let’s say that you have a house that is assessed at $430,000.

The tax rate (mill rate) in your town is $21.70 per $1,000 of value (2.170%).

To calculate the property tax you owe, we just multiply these two numbers, according to the formula we gave earlier:

  • (Property Tax) = (Assessed Property Value)*(Tax Rate)
  • (Property Tax) = ($430,000)*(21.70/1000)
  • (Property Tax) = ($9,331)

So, the property tax would be $9,331 for the year.  You might pay this quarterly to the town, or it might be included in your monthly mortgage payment to the bank.

Example 2: Property Tax Owed (With Abatement, But No Exemptions)

Let’s say that you have a house that is assessed at $430,000.

The tax rate (mill rate) in your town is $21.70 per $1,000 of value (2.170%).

After speaking with the Assessor about a pool you removed, you apply for an abatement.  You receive an abatement of $20,000.

So, the assessed value is adjusted from $430,000 to $410,000.  You will calculate tax based on the lower amount, due to the abatement (change in property value).

To calculate the property tax you owe, we multiply the adjusted assessed value by the tax rate, according to the formula we gave earlier:

  • (Property Tax) = (Assessed Property Value)*(Tax Rate)
  • (Property Tax) = ($410,000)*(21.70/1000)
  • (Property Tax) = ($8,897)

So, the property tax would be $8,897 for the year.

Example 3: Property Tax Owed (With Exemption, But No Abatement)

Let’s say that you have a house that is assessed at $430,000.

The tax rate (mill rate) in your town is $21.70 per $1,000 of value (2.170%).

As a veteran, you apply for a tax exemption.  You receive a property tax exemption of $400.

To calculate the property tax you owe, we multiply the assessed value and the tax rate, according to the formula we gave earlier, and then adjust the tax owed based on the veteran’s exemption:

  • (Property Tax) = (Assessed Property Value)*(Tax Rate)
  • (Property Tax) = ($430,000)*(21.70/1000)
  • (Property Tax) = ($9,331)

Now we adjust the tax owed:

  • (Adjusted Property Tax) = (Property Tax) – (Exemption Amount)
  • (Adjusted Property Tax) = ($9,331) – ($400)
  • (Adjusted Property Tax) = ($8,931)

So, the property tax after your veteran’s exemption would be $8,931 for the year.

Example 4: Property Tax Owed (With Both Abatement & Exemption)

Let’s say that you have a house that is assessed at $430,000.

The tax rate (mill rate) in your town is $21.70 per $1,000 of value (2.170%).

After speaking with the Assessor about a pool you removed, you apply for an abatement.  You receive an abatement of $20,000.

So, the assessed value is adjusted from $430,000 to $410,000.  You will calculate tax based on the lower amount, due to the abatement (change in property value).

As a veteran, you also apply for a tax exemption.  You receive a property tax exemption of $400.

To calculate the property tax you owe, we multiply the adjusted assessed value and the tax rate, according to the formula we gave earlier, and then adjust the tax owed based on the veteran’s exemption:

  • (Property Tax) = (Assessed Property Value)*(Tax Rate)
  • (Property Tax) = ($410,000)*(21.70/1000)
  • (Property Tax) = ($8,897)

Now we adjust the tax owed:

  • (Adjusted Property Tax) = (Property Tax) – (Exemption Amount)
  • (Adjusted Property Tax) = ($8,897) – ($400)
  • (Adjusted Property Tax) = ($8,497)

So, the property tax after your abatement (for removing the pool) and your veteran’s exemption would be $8,497 for the year.

Example 5: Property Tax Owed (Mixed Use Property: Residential & Business Use)

Let’s say you have a mixed-use building valued at $1,000,000.

The commercial portion (a retail storefront downstairs) is valued at $400,000.

The residential portion (a duplex upstairs) is valued at $600,000.

The commercial tax rate in your city is $35.00 per $1,000 of value (3.5%).

The residential tax rate in your city is $20.00 per $1,000 of value (2.0%).

To calculate the tax owed, we need to calculate the residential and commercial portions separately and then add them together:

  • (Tax Owed) = (Tax On Residential Portion) + (Tax On Commercial Portion)
  • (Tax Owed) = (Residential Value)*(Residential Tax Rate) + (Commercial Value)*(Commercial Tax Rate)
  • (Tax Owed) = ($600,000)*($20/$1,000) + ($400,000)*($35/$1,000)
  • (Tax Owed) = $12,000 + $14,000
  • (Tax Owed) = $26,000

So, the property tax would be $26,000 for the year (a combined rate of $26,000 / $1,000,000 or 2.6% ($26 per $1,000 of value).

mixed use
A mixed-use property may have commercial retail space below (on the first floor) and residential space (apartments or condos) above (on the second and higher floors).

What Is A Property Tax Abatement?

A property tax abatement is an adjustment to the assessed value of a property for the purposes of calculating tax owed.

You may find it necessary to apply for an abatement if:

  • The property is overvalued (for example, if the valuation includes a garage that has since been removed).
  • The property is not classified correctly (for example, if a commercial property was rezoned for residential use).
  • The Assessor’s database has an error (for example, if information was entered incorrectly, or if information was not updated after the property was destroyed and rebuilt).

A town may also offer tax incentives (such as abatements) to create an incentive for certain behavior.  For example:

  • A town may offer an abatement to incentivize new home buyers in a town with lots of vacant properties.
  • A city may offer an abatement to businesses if there is a lack of jobs in the city.
  • A city may offer an abatement to housing developers if there is a lack of housing in the city.

How To File For Property Tax Abatement

To file for a property tax abatement, you need to file the proper form with the town, city, or county assessor.

Often, the forms will be standardized for every city and town in a state (such as Massachusetts).  If you are not sure, just ask the Assessor for the proper form.

You will need to provide information such as:

  • Your name
  • Your address
  • Property location (since this may be different from your primary residence)
  • Tax bill number (for property identification purposes)
  • Reason for abatement (overvaluation, incorrect usage classification, etc.)

What Is A Property Tax Exemption?

A property tax exemption is an adjustment to the tax owed on a property.  When you receive an exemption, it means that a part of the tax owed need not be paid (up to 100% of the value for a tax exempt property).

Some common exemptions that you may qualify for include:

  • Legally Blind (often requires a certificate from the state)
  • Senior (over 65, 70, or some other age, depending on state/city)
  • Surviving Spouse
  • Surviving Minor
  • Veterans (you may need a letter from the VA)

What Type Of Property Is Tax Exempt?

A tax exempt organization may not owe any tax on a property.  Examples include:

  • Charitable Organizations
  • Fraternal Organizations
  • Religious Organizations
  • Veterans’ Organizations

Certain nonprofit organizations, such as educational nonprofits, may also qualify for tax exempt status.  Always check with your state and city for details.

Property Tax Abatement VS Exemption (Difference Between Property Tax Abatement & Property Tax Exemption)

So, what is the difference between a property tax abatement and a property tax exemption?  An abatement is meant to ensure that property values are properly assessed, while an exemption is based on your status as a member of a group (veteran, blind, etc.) Dollar for dollar, a property tax exemption is better than a property tax abatement. An exemption of $1,000 reduces the tax you owe by $1,000. An abatement of $1,000 reduces the property value by $1,000, but would only save you a percentage of that amount in tax owed.

For example, if you owe $5,000 in property taxes and receive an exemption for $1,000, then your new tax owed will be $4,000.

However, if you receive an abatement for $1,000 and the tax rate is 2% ($20 per $1,000 of property value), then your tax owed will only decrease by $20 (from $5,000 to $4,980).

You can use this calculator from Smart Asset to calculate your property taxes, based on the assessed property value and tax rate.

Conclusion

Now you know how property taxes are calculated.  You also know about abatements and exemptions, as well as how they work and when they might apply.

I hope you found this article helpful.  If so, please share it with someone who can use the information.

Don’t forget to subscribe to my YouTube channel & get updates on new math videos!

~Jonathon

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