The assessed value of a property is the value your local municipality uses to calculate how much you owe in property taxes.
Learn more about what assessed value means, how it's calculated, and how it impacts you as a homeowner.
Definition and Examples of Assessed Value
Assessed value is typically a percentage of a property's fair market value, which is then used for tax purposes. Local municipalities, such as cities, counties, and school districts, may levy a property tax on properties within the boundaries of that municipality.
Property tax is an ad valorem tax, which is Latin for "according to value." The assessed value of a property is based on a number of factors, but it is not an official appraisal like the one you might get when you're buying or selling a home.
How Assessed Value Works
The tax assessor for your local municipality is responsible for calculating the assessed value of properties within that municipality. The method for determining assessed value can vary from municipality to municipality.
However, in general, assessors start by calculating the fair market value (FMV) of your home. They will look at comparable properties in the area, along with the specific attributes of the home, including square footage and the features of the home. In some cases, assessors may even be required to visit a property personally for an inspection.
Once an assessor calculates the market value of your property, the municipality will calculate how much you owe in property taxes based on a residential assessment ratio (RAR) and millage rate.
In some cases, your tax assessor may reduce your assessed value based on exemptions you qualify for.
The RAR is a percentage that states or municipalities apply to a home’s market value before the tax rate is applied. If your home’s value is $500,000 and the RAR is 40%, your home’s assessed value is $200,000. From there, your municipality will apply a tax rate that’s sometimes called a “millage rate”. The millage rate is typically expressed as an amount per $1,000.
For example, with an assessed value of $200,000 and a millage rate of $15 per $1,000 (or 1.5%), your property taxes for the year would be $3,000 ($200,000 x 1.5%).
Assessed Value vs. Fair Market Value
|Assessed Value||Fair Market Value|
|Calculated by tax assessor||Calculated by appraiser|
|Typically less than what the property would sell at during normal market conditions||Typically equal to what the home would sell at during normal market conditions|
|Based on the local or state assessment percentage||Based on home features, comparable properties, and market conditions|
|Not used during the buying process||Used during the buying process|
FMV is the price at which a property would sell during normal market conditions. The assessed value of a property is typically a percentage of the FMV.
The FMV of a home is typically calculated by an appraiser who uses comparable properties, market conditions, and features of your property to determine a value.
What Assessed Value Means for You
The assessed value of your home is important because it determines how much you owe in property taxes every year. As the value of your home increases over time—typically, it’s updated annually—your property tax bill is likely to rise, too.
If you believe that the assessed value of your property is incorrect, you can dispute it and request a reassessment.
Remember, though, that in many cases, you don't pay your property taxes directly. Instead, your loan servicer estimates how much you'll owe and divides that estimate into monthly payments. The servicer then tacks those monthly payments onto your principal-and-interest payment.
When property taxes are due, the servicer will pay them on your behalf. If the estimate was correct, nothing changes. But if the assessed value increased and you owe more property taxes than what you paid, you may need to make a lump-sum payment into your escrow account to satisfy the amount owed. On the flip side, if the lender overestimates what you owe, you may receive an escrow refund.
In some cases, you may be able to pay property taxes on your own without contributing money to an escrow account.
- The assessed value of a property is the value that local municipalities use to calculate property taxes.
- Methods of calculation can vary depending on where you live, but many of the core factors remain the same.
- Unlike fair market value, assessed value is not used during the buying or selling process of a home.
- Understanding how assessed value works can help you ensure that you're paying enough in property taxes every year.