Is the Property Tax Assessment Fair Market Value?

Posted on July 6th, 2010 by Carlo Capomazza
This is a question as a real estate agent I often hear. Sellers typically want their property tax assessment to be low so that their taxes are low, so they almost always feel that their home is worth more than the tax assessment indicates. Buyers typically don't want to pay more than the property tax assessment because they feel that if the jurisdiction the real estate is in has determined a certain value, then they shouldn't pay more for a property than that amount.
According to Dictionary.com, the definition of assessment is: An official valuation of property for the purpose of levying a tax; an assigned value. True fair market value of any commodity (real estate included) is arrived at when a buyer and seller agree to a price with specific terms and consummate the transaction; neither party is under duress, the parties are unrelated and thus at an "arms length"; the commodity has had adequate exposure to the open market and financing terms are typical. So the technical answer is the property tax assessment is not fair market value. But as is so often the case, the answer is more complicated than a simple yes or no.
Most tax assessments are obtained by looking at values in the neighborhood and is in a way a mass estimation. The more homogeneous a neighborhood is and the more stable the market conditions, the closer the assessment will likely be to fair market value. If prices are rising, the assessment is usually below the market and if prices are falling, the assessment is typically above the market. This delayed reaction occurs with assessments because the process requires the assessor to look in the past and fair market value occurs in the present, in real time.
Most counties use actual sales that occurred in the previous year for the neighborhood in order to estimate the assessment for a particular property. Neighborhood is loosely interpreted as the entire zip code. Like properties are considered, for example, condos will be mass compared to other condos, townhouses with townhouses and detached homes of similar size and acreage will be compared to like homes. So in other words, the tax assessment is typically 90% of the previous year's fair market value.
Often times the tax record does not accurately reflect features and improvements of a property. It is the responsibility of each home owner to notify the assessment authority if there are any discrepancies in the record. It has been my experience, however, that home owners are reluctant to advise the assessment office of inaccuracies because if the evaluation of their home rises, the property taxes will increase as well.
At selling time the owner insists the home worth far more, yet when buying features and improvements are muted to lower the price and the property tax. All of this anxiety may be put off if a seller is willing to 'carry paper' so the new buyer may enjoy the lower property tax, assumng the seller has transacted and owned the property for years before most real appreciation which would be affecting the property tax. But this puts off the adjustment in property tax until the property's deed finally transfers to the buyer once the seller's carried paper is paid up - and then the property is reevaluated at the value at the time of the title transfer or transaction. So, some money can be saved by savvy sellers and buyers - who get along and are transparent. Thanks Karen Briscoe.
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