Fair Market Value & Tax Assessment

A tax assessor probably won't inspect your home unless you appeal the assessment.

An assessment is a valuation of a property -- how much it is worth. Every state taxes property based on assessment, although the specific definition of this term and the methods to undertake it vary from state to state. In most states an assessment is a property's "market value" or "fair market value," both phrases meaning the price a property would sell for on an open market.

Fair Market Value Definition

Fair market value is the amount of money a knowledgeable buyer would pay for a property. In a fair market transaction neither buyer nor seller are pressured by outside forces (such as in a short sale). The transaction is also what is referred to as an "arm's length transaction" -- one in which there is no relationship between the buyer and seller causing an influence on price. Fair market value is also derived when the property is marketed for a sufficient period of time to produce a competitive price.

Determination

There are three principal methods of determining market value: cost of replacement, income and sales comparison. Typically state law specifies the method local tax assessors must use in an assessment and the local tax assessors implement it. Many states principally use the sales comparison method for homes. The income method -- determining value by the amount of income a property produces -- is often used for commercial property. In most places you can appeal a tax assessment if you do not believe the assessed value represents fair market value. You cannot appeal tax rates or your actual tax amount.

Exceptions

Not every state uses fair market value in a tax assessment. California diverges from the typical practice more than any other state. It does employ fair market value when a property is sold. But in subsequent years the assessed value is limited to no more than a 2 percent increase over the previous year. When real estate prices rise more than 2 percent a year on average, an assessed value no longer reflects fair market value in this state.

Taxation

Actual property tax is determined by multiplying a tax rate by a portion or the entire assessed value. In some states, less than half the assessed value is used to determine property tax. In others, it is the entire value. Rates also vary significantly from state to state. Additionally, many states offer tax exemptions and/or tax credits for certain classes of property and certain classes of tax payer. Tax assessment, then, is just one aspect of a property tax.

References

• FindLaw: Assessed Value: Property Tax Assessment
• New York State Office of Real Property Tax Services: How the Property Tax Works
• California Board of Equalization: California Property Tax; August 2009
• Tax Foundation: Tax Data