Why Assessed Value Matters in Real Estate

June 18, 20237 min read
Why Assessed Value Matters in Real Estate
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Key Takeaways

  • Assessed value is the dollar value attached to a house or other property exclusively for the purpose of setting property taxes.
  • Assessed value is not the same as fair market value, which is what the property could sell for, but it is frequently based on a percentage of assessed value.
  • Most cities and states calculate assessed value as a percentage of the fair market value of the house or another property.

Assessed value is an important keyword to understand in the real estate investment space, since it involves property taxes and influences the amount for which a property will sell. Every investor and homeowner should know what assessed value is and how it works, as well as its implications.

Here is assessed value, how it is calculated, and examples of such calculations.  

What is Assessed Value?

Assessed value is the dollar value attached to a house or other property exclusively for property tax purposes. Every state in the nation has some form of property tax. Generally, the higher the property’s tax-assessed value, the higher one’s property taxes will be. 

It is the job of a government assessor to assign the property’s value and to periodically update it. Specified tax districts usually designate the government assessors, and procedures for calculating assessed value may vary. The fundamental process for assessing value is the same for all, however.

For those selling a house, the property’s tax-assessed value is its most broadly accepted dollar value and the most stable indicator of a property’s worth.

Note that assessed value is not the same as fair market value — what the property could sell for under current market conditions — but it is frequently based on a percentage of the assessed value. In any case, they each help determine a property’s worth.  

Also note that, for an owner-occupant, rather than a landlord, the assessed value may be lower, circumstances that are sometimes called what is known as a homestead exemption. While such an exemption could lower the property tax bill, it does not impact the property’s market value. 

How to Calculate Assessed Value

Most cities and states calculate assessed value as a percentage of the fair market value of a house or another property. The percentage can vary markedly, depending on the location. For example, Massachusetts has one of the nation’s highest assessment ratios for owner-occupied single-family homes, at 100 percent. Mississippi, meanwhile, has one of the lowest, at 10 percent. Typically, the percentage is between 80-90%.

Generally, the assessed value is calculated as: Market Value x Assessment Rate. However, a property’s assessed value is but one factor employed to establish property tax amounts. Some assessors calculate property taxes by using an equation such as the one below, which usually includes a millage rate:

Fair Market Value x Assessment Ratio x Millage Rate = Effective Property Tax

The millage rate is the tax rate that is applied to the property’s assessed value. Typically, millage rates are expressed per $1,000, with each mill representing $1 in tax for every $1,000 of assessed value.

Say a house has a fair market value of $300,000 in a region that utilizes a mill rate of 20 mills and a 50% assessment ratio. That house would have an annual property tax of $3,000 ($300,000 x 0.50 = $150,000, and $150,000 x 0.02 = $3,000).

Similarly, perhaps a city has a 70% assessment ratio and a mill rate of 32. The yearly property tax on a house with an assessed value of $350,000 would then be $7,840:

($350,000 x 70%) x 32/$1,000 = $7,840. 

While market value and assessment rate are essential components of appraised value, an assessor utilizes what is called a comparative market analysis to be certain they are making an accurate and fair assessment.

Note, too, that some states also levy taxes on some personal property – cars, motorcycles, mobile homes, and boats, for example — which is typically based on the property’s assessed value. 

Factors That Influence Assessed Value

Factors that go into the assessed value include market conditions, digitally generated comparable sales data, local property values, home inspection, number and types of rooms, square footage, and property features and characteristics such as outbuildings, decks, a built-in-pool, or additional garage bays.

The appraiser will likely not count interior improvements such as an upgraded bathroom or finished basement suite toward the home’s assessed value, although such improvements can raise market value quite a bit. In fact, appraisers generally do not even look at the interior of the home being appraised. Drive-by assessments are relatively common, and assessed values may even be established through public records that describe the home’s features and characteristics.

Assessed Value Put to Practice in the Real World

Here is an example of assessed value as it is put in practice in the real world. Say one’s home is assessed value-wise for tax purposes. The assessed value is put at $500,000, and the local assessment tax is 80%. Thus, $500,000 x 80% = $400,000, which is the home’s taxable value. The $400,000 will be used by the government to calculate the homeowner’s property tax bill. 

In another example, If the market value of one’s home is $150,000 and the county’s assessment rate is 80%, that would put the assessed value at $120,000. 

Significance of Assessed Value

In addition to determining the property tax amount, assessed value plays a major role in property insurance, provides a rough estimate of the home’s value, and helps governments levy the appropriate amount of property taxes. Assessed value also helps homeowners with budgeting and planning, and is important when making comparisons and, if necessary, making property tax appeals.

In terms of property insurance, assessed value helps property owners determine the amount of coverage they need. Such insurance is based on assessed value rather than market value.

Further, the government depends on such assessments to levy the right amount of property taxes, since basing such taxes off market value would make such taxes much more expensive.

Because assessed value gives an approximate estimate of a home’s value, property owners looking to resell know the minimum amount they will make, which is important for planning purposes.   

Assessed Value: Considerations

There are multiple considerations, when it comes to assessed value, namely:

  • Assessment rates. The assessment rate is a percentage of a maximum of 100% that figures in factors that could increase or decrease the value of properties in a given area.
  • Assessment periodicity. Assessments are generally updated every five years but might be conducted more often if a property is damaged or enhanced. Also, depending on the city or state involved, assessors might have to visit the properties in person periodically for assessment purposes. 
  • Appeal process. Owners who wish to dispute the assigned assessed value can seek property reassessment. This is where a site visit may be scheduled. If the homeowner seeks to appeal against what the owner believes is an excessively high tax bill, it must be done with a window of between 45 to 60 days.  However, filing an appeal does not guarantee a reduced assessment. 

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Ultimately, assessed value is important in that it allows owners of real estate to determine their property tax amount, prepare for tax payments, compare their assessed value to others, and more. While every investment carries some degree of risk, making better and more-informed decisions can help with mitigation.

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