Real Estate Basics-Real Estate Taxation

Posted by admin on July 25, 2010 under Real Estate License Basics | Be the First to Comment

For this installment of our Real Estate Basics series we will review real estate taxation as it applies to your real estate courses. Here we will cover the basics of what you need to know for your real estate license exam.

There are two types of real estate taxes that are levied on specific properties. These taxes are automatically liens on the property and do not need to be recorded to be valid.

The first type of real estate tax is known as a special assessment tax. If a property benefits from a public improvement like a street or sewer system then the city, county or the state can impose a tax for usage of these services. Unless there is a written agreement in place stating otherwise, special assessment taxes must be paid in full prior to any transfer of property. Special assessment taxes are the priority for payment; they are always paid ahead of other property taxes and in the case of foreclosure are listed first on the deed of trust.

The other type of real estate tax is called a general tax or Ad Valorem. Ad valorem is Latin for “according to valuation”. This type of tax is based upon the property value. The property is appraised and assessed by a government agency for its tax value. Land values are compared to comparable land sales to determine their value while buildings are appraised using replacement cost less depreciation. If one county’s assessments are out of line with other counties in the state, the equalization factor is multiplied by the tax to make the county more or less equal to the rest of the state.

To earn your real estate license you should also know how to calculate tax rates. If you have the taxes and the assessed value of a property, then you can divide the taxes by the assessed value in order to determine the tax rate. If you have the taxes and the rate then you can use the same formula to calculate the assessed value by dividing the taxes by the rate. With the assessed value and the tax rate you would multiply to determine the amount of tax.

Tax rates are stated in Mills which is equal to 1/1000^th of one dollar. The appropriate numeric representation of a mill is .001 and this is likely to be something you will be asked on a real estate license exam. Single digit mill rates can be transformed used in an equation by adding a decimal point and two zeros to the left of the mill rate. For example, when you are given a tax rate of 7 mills, .007 should be used for any calculations. For a double digit mill rate you would add a decimal point an a single zero to the left of the rate, so a rate of 15 mills would be .015. A mill rate of 15.5 would be .0155. For example if you were to get a question that read:

What is the amount of tax due on a property with an assessed value of $500,000.00 and a tax rate of 5 mills?

The correct equation would be 500,000 X .005