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The assessed value of your home allows the government to calculate your property taxes.

Not to be confused with the appraised value of your home, the assessed value is what the government uses to calculate property taxes. Meant to be utilized regardless of market conditions, the assessed value is generally 20% to 40% lower than the fair market value. For that reason, prospective homebuyers won’t get far trying to bid an asking price down just on the basis of the lower assessed value. Instead, to afford the home of your dreams, consider working with a financial advisor who can help you grow your savings.

Breaking Down the Assessed Value of a Home

To calculate property taxes, municipality officials usually appoint an assessor or appraiser to determine a home’s value. Rules vary by tax districts, but the assessor typically compares the home to similar ones in the surrounding area. Some districts require a thorough inspection of the property. The appraiser may consider the following points when determining a property’s value:

  • Features and condition of the home
  • Curb appeal
  • Size and square footage
  • Surrounding properties
  • Access to public services

In many cases, however, the assessment process will be aided by computers and databases that contain property records and real estate data.

One the property value is assigned, it is multiplied by a percentage to determine its assessed value. Each tax district sets that percentage, aka the assessed ratio. Mississippi has one of the lowest ones at 10%, while Massachusetts hits property owners with 100%. However, some states limit how much an assessed value can grow in a year. For instance, Oregon currently caps increases at 3%.

After the assessor has computed your home’s assessed value, he or she takes it through yet another calculation to determine your property tax. Each jurisdiction sets a different one, but states usually use the following equation, which factors in the assessed ratio:

Fair market value X assessed ratio X millage rate

The millage rate is the tax rate, given per $1,000 of a property’s assessed value. In addition, some states also require tax on personal property such as mobile homes and boats.

Difference Between a Home’s Fair Market Value and Assessed Value

As noted earlier, the assessed value is used to figure out your property taxes. Except in Massachusetts, it’s usually lower than your home’s fair market value, which is what the property could sell for. The reason: counties are trying to account for changing real estate market conditions. If you’re a prospective buyer, you should know that banks will use the fair market value, not the assessed value, when approving mortgages.

How Do Property Taxes Work?

assessed value of a home

The higher the assessed value of your home, the more you’ll pay in property taxes. That’s why most homeowners don’t complain that their assessed value is too low. If they try to have their assessed value changed, it’s usually to lower it even more.

Indeed, many may be seeking a reassessment in hopes of decreasing their property taxes, since the Tax Cuts and Jobs Act signed into law by President Donald Trump took effect. The law caps the federal deduction for state and local taxes (SALT), which include property taxes.

That said, property taxes help fund public services. In some areas, they also fund schools.

How to Keep Property Taxes Down

The average homeowner pays $2,127 in property taxes a year, according to a report by Cornerstone Lending. If you are looking to lower yours, there are a few steps you can take.

Start at the local assessor’s office, where you can obtain a copy of your property tax ID. Here’s where you may find some errors and justify a reevaluation of your home’s assessed value. If not, examine tax bills on surrounding property for discrepancies. Because they are public records, you can easily find these online.

There are also dozens of local organizations dedicated to correcting property tax laws and shielding citizens from sky-rocketing property taxes. Alternately, you can hire law firms with staff specifically trained to handle all the paperwork for you. But keep an eye out for ones that don’t charge an up-front fee and instead construct fees around your actual tax savings.

Finally, if you believe you’re overpaying, take the fight straight to the local tax office. Rules vary by state, but you may just need to fill out a Property Tax Appeal of Assessment Form to have your home reassessed. And if you can shell out some out-of-pocket money, you can hire a professional to conduct another assessment.

Figuring out the assessed value of a home

Tips for Future and Current Homeowners

  • When determining how much house they can afford, prospective buyers should remember to figure in the property taxes they’ll be paying. To determine what the taxes will be, use our property tax calculator. Just pull your state from the drop-down menu.
  • Your home is probably your largest asset. Many Americans think of it as their retirement plan, though they also plan on living in it forever. To make sure you have enough in savings while living out your years in your home, consider working with a financial advisor. Our SmartAsset financial advisor matching tool will connect you with up to three financial advisors in just five minutes. You can compare their qualifications before deciding to work with them.

Photo credit: ©iStock.com/designer491, ©iStock.com/wutwhanfoto, ©iStock.com/erdikocak

Javier Simon, CEPF® Javier Simon is a banking, investing and retirement expert for SmartAsset. The personal finance writer's work has been featured in Investopedia, PLANADVISER and iGrad. Javier is a member of the Society for Advancing Business Editing and Writing. He has a degree in journalism from SUNY Plattsburgh. Javier is passionate about helping others beyond their personal finances. He has volunteered and raised funds for charities including Fight Cancer Together, Children's Miracle Network Hospitals and the National Center for Missing and Exploited Children.
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