How Are Your Real Estate Taxes Set & How Much Do You Pay?

A major expense of owning your own home is your local government’s real estate tax.  It usually comes to several thousand dollars each and every year.  I have studied my county’s budget for FY 2011 and made some surprising discoveries concerning how our local real estate tax charges are calculated.  If you are concerned about the amount of your real estate taxes, you might want to do something similar.

Revenue from real estate taxes amounts to about half of the total revenue for most local governments.   It is important to understand how it is decided and what the tax money is used for because it does take a lot of money out of your pocket if you own real estate.  You as a citizen can affect the situation over time if you want to and work at it

The local government starts the process by setting an “assessed” value of your property for tax purposes.  In most localities the assessed value is the fair market value.  In some places it is a percentage of fair market value.  In some places, the assessed value of most properties is pretty close to what the jurisdiction says it is – that is to say, 100% of fair market value, or 80% of fair market value, or whatever.  In other places, there is significant disparity between what the assessed value is said to be and what it actually is. 

The local government usually has an assessor estimate the value of your property every few years.  When each new assessment period comes around and the new assessments are made known, it often causes a furor because property owners believe the assessments are not realistic.  Sometimes this is with good cause, sometimes not.

In the case of my county (Craven County, North Carolina), the assessors have recently (late spring 2010) estimated that property values have increased an average of 32% since the last assessment which was done 8 years ago.  Property owners with river frontage have seen increases of as much as 300%.  However, most property owners believe that in the last 3 years or so, the value of their properties has dropped significantly, and no bottom appears to be in site.  Home sales have slowed almost to a stop.  Properties are taking a long time to sell.  It isn’t unusual to see properties on the market for a year or even a bit longer.

I’ve wondered what would be a fair method of assessment that isn’t as vulnerable to “tinkering” as the system most localities currently use.  Would it be fairer and simpler to set the tax value at the sales price whenever a property is sold so long as the transaction is between two unrelated parties (not a special deal for a family member or close friend)?

Of course, that would mean that some properties would retain a low tax value if they were owned by the same people for a very long time, but it would avoid the cost of paying assessors every few years.  In the case of Craven County, the cost of paying assessors was about a half of a million dollars this year.  That’s a fairly significant sum for a county with a total budget of about $92 million.  Another plus would be that we’d stop taxing old people out of their homes.

Be that as it may, once the assessed value is established, the next thing the local government does in this process is to set the “Real Estate Tax Rate.”  This is typically expressed as the amount of money per $100 dollars of assessed property value the real estate tax will be.  To come up with your annual tax amount, your assessed value would be divided by $100, and the result would be multiplied by the tax rate.  For example, if your assessed value is $450,000 and the tax rate is .4728 cents per $100, your annual real estate tax will be $2,127.60. 

In Craven County, the tax rate has historically been less than a dollar per $100.  In other areas it is much higher.  And there are all sorts of ways the local government can obscure what’s happening.   

The tax rate is typically “reverse engineered.”  By that I mean is that the budget is usually agreed upon, and then the rate is set at a figure that will produce the desired income.  As with state and federal governments, local governments aren’t generally keen on cutting expenses.  In fact, they are typically raised year after year unless taxpayers are very vocal in opposition.

In the case of Craven County, a rather sneaky mechanism has been used to achieve the tax rate.  The Board of Commissioners has worked toward a “revenue neutral” tax rate.  Sounds like a rate that will produce the same revenues as last year, right?  Well, that’s where it starts, but that’s not the end of it. After the assessment is done and the rate that would keep tax revenues the same is figured, something is added to the rate.  It’s the value of all improvements to real estate through out the county.  In June 2010 in Craven County, this came to an increase of 3.8%.  The end result is that taxpayers will, overall, pay 3.8% more taxes with a “revenue neutral” tax rate.

It’s very likely that your local government has its own methods of getting tax increases passed in such a way that you don’t see it coming until you’re presented with your tax bill.  If such things concern you, attend public hearings, listen, and ask questions until you understand how things work.

If you like the way the process works in your community, that’s great.  If you do not, perhaps you need to communicate your preferences to your local government and encourage others to do the same. 

Raynor James

June, 2010