You've probably noticed that a property's list or sale price is often different from the tax-assessed value. This is because a list/sale price is determined by a "fair market value," or what a person would pay in the open market in a reasonable listing period. The tax value is determined with city, county or state tax rates in mind for annual property taxes.
Fair Market Value
Often when you consider what most people call a home's "worth," you are reviewing a property's "fair market value." This value is simply dictated by what a reasonable buyer would pay for the home without any special circumstances or a prolonged listing period. It's considered "fair" because a free market, the availability of other similar homes, the economy, the location and amenities of the property are determining what buyers are willing to pay, rather than a cut-and-dry calculation.
In contrast, a property's assessed for taxes value is the number that would be used every year by the applicable municipality to determine the owner's portion of property taxes. This is determined not by what a reasonable buyer would pay in the current market with supply and demand in mind, but what the governing municipality deems an acceptable value for tax purposes. The exact method and frequency of assessment varies greatly among states and municipalities, but most often the assessed value is lower than the fair market value. In most areas, the assessed value will be an agreed-upon percentage of the fair market value for tax calculations. So, even if all homes are assessed at 80 percent of their fair market value, taxes are still proportional among homeowners.
Reason for Differences
Many people wonder if a municipality is trying to determine an accurate value of a property through an analysis of condition, size, improvements and comparable properties, why is that not a fair market home value? Ideally the values should be the same, but they are often not because homes might not be assessed as frequently and prices are not required to be adjusted with market concerns in mind. And, tax assessors aren't taking into account the full spectrum of supply and demand, buyer trends, availability of financing and other open-market factors. More importantly, factors like a busy road, a lack of a useable backyard, a desirable view or significant upgrades might not fully come into play in the tax assessed value. Overall, in the majority of instances, the tax value is usually lower than the fair market value.
If you are a seller trying to determine what you might receive in a sale or if you are a buyer trying to determine a reasonable offer on a property, likely the fair market value is what you want to take into account. This is the value that most closely affects the purchase and sale. However, the assessed value is also important because it not only needs to be taken into account in terms of what you can afford in property taxes every year, but it also can affect your financing options. Though financing varies from lender to lender, some financial institutions might only offer financing as a percentage of the assessed value. It is important to look at the tax assessment properties specific to your city/municipality as well as the requirements of your specific lender.
- The New York Times: Your Home; Market vs. Appraisal: What's the Real Value?
- Modern Real Estate Practice: Galaty, F., et al.
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