19 Real Estate Taxation
Taxing Entities
Ad Valorem Taxation
Special Assessments
Tax Lien Enforcement
TAXING ENTITIES
State government
County and local government
Tax districts
Real estate taxation refers to the taxation of real estate as property. Real estate
property taxes are imposed by "taxing entities" or "taxing districts" at county and
local levels of government.
There are no federal taxes on real property. The Constitution of the United States
specifically prohibits such taxes. The federal government does, however, tax
income derived from real property and gains realized on the sale of real property.
The federal government can impose a tax lien against property for failure to pay
any tax due the Internal Revenue Service.
State government States may legally levy taxes on real property, but most delegate this power to
counties, cities, townships and local taxing districts. Some states place limits on
how local governments may levy such taxes. States may impose a tax lien against
property for failure to pay any real property taxes which the state has levied or
delegated to local taxing bodies.
County and local
government Counties, cities and municipalities, townships and special tax districts levy taxes
on real property to raise funds for providing local services. It is common for the
county to collect all real property taxes and distribute it among the other taxing
bodies.
Tax districts County and local governments establish tax districts to collect funds for
providing specific services. The boundaries of such districts typically do not
coincide with municipal boundaries. The major tax district in most areas is the
school district. Other important tax districts are those for fire protection,
community colleges, and parks.
A property tax bill might include tax levies from such districts as the following.
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- bridge and highway - health services
- nursing home - historical museum
- storm water management - sanitorium
- township - forest preserve/land management
- fire district - public library district
- school district - park district
- retirement fund - community college district
In addition to generally established tax districts, a local government authority
may establish a special tax district to pay for the cost of a specific improvement
or service that benefits that area. For instance, a special tax district might be
created to fund extension of municipal water service to a newly incorporated
area. Unlike a permanent tax district such as the school district, a special tax
district is temporary, ceasing to exist once the costs of the specific project have
been paid for.
AD VALOREM TAXATION
Tax base totalling
Homestead exemption
Other exemptions
Tax rate derivation
Tax billing and collection
General property taxes are levied on an ad valorem basis, meaning that they are
based on the assessed value of the property. Assessed value is determined
according to state law, usually by a county or township assessor or appraiser.
The actual tax, though based on assessed value, may be derived as a legislated
percentage of the assessed value. Land and improvements may be assessed
separately. Ad valorem taxes are paid annually.
Tax base totalling The tax base of an area is the total of the appraised or assessed values of all
real property within the area's boundaries, excluding partially or totally exempt
properties:
tax base = assessed values - exemptions
Taxing entities generate the annual revenues they require by levying taxes on the
tax base. The tax rate, or millage rate, determines how much of a tax levy the
tax base will receive. The tax rate for each taxing entity is calculated by dividing
the amount of revenue required by the tax base. This rate is then applied to the
taxable value of each individual real property to determine its tax levy.
Value assessment. County or township officers, called assessors or appraisers,
value the real property within their jurisdiction for purposes of levying taxes.
This valuation process results in an assessed value. Assessment practices differ
from state to state. In many states, assessed value does not reflect the market
value that an appraisal for other purposes might aim to estimate. For instance, in
some areas, assessors use a sales comparison approach to assess the value of land
and a cost approach to value improvements.
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The role of the assessor in the taxing process is limited to making the valuation
and notifying the owner of the assessed value; other tax officials determine the
tax rate and the tax levy.
Equalization. Some taxing bodies recognize that local assessments can lead to
unfairly high or low values for properties in certain areas. Therefore the
jurisdiction may establish equalization factors to level out the unevenness of
valuations. For instance, if assessed values of properties in one county are
consistently ten percent below the average for other counties, an equalization
board may multiply each assessed value in that county by a factor of 110% to
raise them to the average level for the state.
Appeals. Property owners may object to the assessed value of their property, but
not to the tax rate. An owner usually has a certain period to protest after receiving
notice of the assessed value. According to local law, a property owner must
present evidence that the assessor made an error to a review board or appeal
board. Typical evidence would include market data on comparable properties that
sold recently, or evidence that neighboring properties had less appreciation or
even declined in assessed value in comparison with the protestor's property. An
owner who is dissatisfied with the actions of the appeals or review board can take
the protest to court.
Homestead
exemption A homestead is a parcel of real property that is owned and occupied as a family
home. Some states exempt a portion of the value of the homestead from
judgments to protect families against eviction by creditors. States and counties
may exempt a portion of the assessed value of the principal residence from
property taxation.
A property owner generally qualifies for a homestead exemption by meeting two
criteria:
is head of a family
resides on the property for a required length of time
Some states also allow a single person to claim the homestead exemption.
Depending on state law, home owners may have to apply every year for the
exemption, or they may receive it automatically without filing.
Other exemptions Properties. Most states exempt certain types of property from property taxes.
Certain classes of property owner may also be exempted or have a reduced
liability. Exempted are:
Government-owned properties
real properties owned by federal, state, and local governments are
immune from real property taxation
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Properties owned by non-profit organizations
real properties owned by churches and non-profit organizations are
exempt from real property taxation
Owner classes. Miscellaneous exemptions may be granted to classes of property
owner, such as: senior citizens, widows, and disabled individuals.
States and municipalities may also offer property tax reductions or exemptions to
certain industries to encourage economic growth.
Tax rate derivation Tax district budgeting. The derivation of a tax rate, or millage rate, begins with
the taxing body determining its funding requirements to provide services for the
year. This requirement is formalized in the annual budget. Then the county or
district looks at its sources of revenue, such as sales taxes, business taxes, income
taxes, state and federal grants, fees, and so forth. The part of the budgeted
expenditures that cannot be funded from other income sources must come from
real property taxes. This budgetary shortfall becomes the ad valorem tax levy.
The tax levy is derived every year, since budget requirements and revenue tallies
are performed on an annual cycle.
Tax rate. Each individual taxing body has its own tax rate. The tax rate is
determined by dividing the taxing body's budgeted amount to be collected from
real estate taxes by the tax base:
tax requirement
--------------------- = tax rate (millage rate)
tax base
If, for example, a taxing body needs $500,000 from property taxes, and the tax
base for the district is $15,000,000, the tax rate for this body is:
500,000
------------- = .03
15,000,000
This tax rate of .03 or 3% may be expressed in a number of ways, depending on
local practice: as mills, as dollars per $100 of assessed value, or as dollars per
$1,000 of assessed value. A mill is one one-thousandth of a dollar ($.001). A tax
rate of one mill means that the owner pays one dollar for every thousand dollars
of assessed value. Thus the rate of .03 above could be expressed as:
30 mills
$3 per $100
$30 per $1,000
3 percent
Tax rate limitations. Some states, counties or other taxing districts place
limitations or caps on the absolute millage rate or the annual increase in millage
for property taxes. In such situations, taxing bodies are forced to limit their
budget requirements, unless there has been a sufficient increase in tax base to
produce the required funds without raising the millage rate.
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Tax billing and
collection Individual owner billings. Each property owner's tax bill is determined by
multiplying the tax rate for each taxing district times the taxable value of the
property. Taxable value is the assessed value after all exemptions and
adjustments have been taken into account.
For example, a certain property is owned and occupied as a primary residence
and qualifies for a homestead exemption. The assessed value of the property is
$240,000, and the exemption is $75,000. The property is taxed by the school
district at a rate of 5 mills, and by the county at a rate of 2 mills. The property tax
bill for these items would be calculated as follows.
Exhibit 19.1 Tax Bill Calculation
I. Taxable Value
assessed value $ 240,000
- homestead exemption $ 75,000
taxable value $ 165,000
II. Tax Calculations
taxable value $ 165,000
x 5 mills—school dist. .005
school tax $ 825
taxable value $ 165,000
x 2 mills—county .002
county tax $ 330
III. Totaling
school tax $ 825
+ county tax $ 330
total tax bill $ 1,155
Payment deadlines are usually set by law and differ from region to region.
Different taxing bodies may have different fiscal years, and as a result may issue
tax bills at different times of the year. It is more common for a county to issue a
bill that consolidates the bills of all the lesser taxing bodies. The consolidated bill
may be payable annually, semi-annually, quarterly, or on some other schedule as
prescribed by law. In many cases where the owner has a mortgage and a required
escrow account, the escrow officer will pay the tax bill. The owner will only
receive notice of the assessed value and the tax statement.
SPECIAL ASSESSMENTS
A special assessment is a tax levied against specific properties that will benefit
from a public improvement. Common examples are assessments for sidewalks,
water service and sewers. Special assessments are based on the cost of the
292 Principles of Real Estate Practice
improvement and apportioned on a pro rata basis among benefiting properties
according to the value that each parcel will receive from the improvement.
For example, a dredging project is approved to deepen the canals for a canal-front
subdivision. The project cost is $200,000. Although there are 100 properties in
the subdivision, only the 50 that are directly on the canal stand to benefit.
Therefore, assuming each canal-front lot receives equal benefit, the 50 properties
are each assessed $4,000 as a special assessment tax. Note that once the work is
completed and paid, the assessment is discontinued.
If a taxing entity initiates an assessment, the assessment creates an involuntary
tax lien. If property owners initiate the assessment by requesting the local
government to provide the improvement, the assessment creates a voluntary tax
lien.
Special assessments are usually paid in installments over a number of years.
However, taxpayers generally have the option of paying the tax in one lump sum
or otherwise accelerating payment.
TAX LIEN ENFORCEMENT
Sale of tax certificates
Tax deed
Tax sale
If taxes remain unpaid for a period of time specified by state law, the tax
collecting agency may enforce the tax lien in several ways, depending on what
the law prescribes.
Sale of tax
certificates Some states sell tax certificates. The buyer of a tax certificate agrees to pay the
taxes due. After a period of time specified by law, the holder of the tax certificate
on a property may then apply for a tax deed.
Tax deed A tax deed is a legal instrument for conveying title when a property is sold for
non-payment of taxes. The application for a tax deed causes the taxing agency to
institute a tax sale or tax foreclosure.
Tax sale A tax sale is frequently some type of auction. If the tax has not already been paid
through the tax certificate process, the buyer of the property must pay the taxes
due. There is usually a legally-prescribed redemption period during which the
defaulted taxpayer has the right to buy back the property and reclaim title. If the
taxpayer can redeem the property by paying the delinquent taxes and any other
charges before the tax sale occurs, this right is known as an equitable right of
redemption. If the taxpayer can redeem the property after the tax sale, this right is
known as a statutory right of redemption. In this case, the taxpayer must pay the
amount paid by the winning bidder at the tax sale, plus any charges, additional
taxes, or interest that may have accumulated. If the defaulted taxpayer does not
redeem the property within the allotted time, the state issues the tax deed to
convey title.
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Exhibit 19.2 Tax Lien Enforcement
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19 Real Estate Taxation
Snapshot Review
TAXING ENTITIES ● no federal ad valorem taxes, only federal tax on income and gain; federal
government can impose a tax lien against real property
State government ● states may levy property taxes but many delegate this power to county and local
government; states can impose a tax lien against real property
County and local
government ● counties, cities, municipalities, townships and special tax districts levy taxes on
real
property
Tax districts ● established to collect funds for providing specific services, e.g., schools, fire
protection, parks, community colleges, libraries, road maintenance
AD VALOREM
TAXATION ● property tax levied annually on the taxable value of a property in order to help
fund
government and public services
Tax base totalling ● tax base equals the total of assessed values of all real property within the area,
excluding exemptions
Homestead exemption ● a tax exemption of a portion of the assessed value of a property owned and
occupied as a family home
Other exemptions ● immune from tax: government-owned properties; exempt from taxes: properties
owned by non-profit-organizations
Tax rate derivation ● (1) taxing entity determines what budget requirements must be met by ad valorem
tax; (2) divide tax requirement by the tax base
● tax rate stated as mills ($.001), or dollars per $100 of assessed value, or dollars
per $1,000 of assessed value, or as a percentage of assessed value
Tax billing
and collection ● individual tax bill: tax rate times taxable value
● taxable value: assessed value minus exemptions and adjustments
SPECIAL
ASSESSMENTS ● tax levied against specific properties that will benefit from a public improvement;
amount is based on a pro rata share of the cost of the improvement and the
value
each parcel will receive from the improvement
TAX LIEN
ENFORCEMENT
Sale of tax certificates ● the buyer of a tax certificate agrees to pay the taxes due and after a period of time
may apply for a tax deed on the property
Tax deed ● conveys title in the tax sale
Tax sale ● the buyer must pay the taxes due, if still unpaid; the defaulted taxpayer may be
able to redeem the property and reclaim title; if not redeemed, the state issues the
tax deed to convey title to the buyer
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