taxes and real estate Flashcards
Taxes, am I right? We all pay a bunch of different kinds of taxes, like income tax on the money we make and sales tax on the stuff we buy.
How Property Taxes Work
Property taxes are levied at the local level and fund municipal services like fire control, police, schools, roads, and local health initiatives.
Ad Valorem Taxes
Property taxes are ad valorem taxes, which means they are based on the assessed value of a property.
What does that mean exactly? Well, when you own a home, you’re given a tax bill every year from the local tax authority. It’s based on a percentage of the assessed value of your home.
Ad Valorem
Primary property taxes fund school districts, community colleges, as well as county and municipality governments.
Secondary property taxes apply to paying off voter-approved debt for things like capital and infrastructure projects.
Faithful Funding
Exactly why do governments rely so heavily on the funds generated from property tax? There are actually a few reasons that make property taxes a reliable channel for funding:
In comparison to other capital like stocks, property values remain fairly steady.
Property taxes are difficult to conceal.
Compliance for paying property taxes is high.
The administrative costs associated with collecting property taxes are low.
Taxes
As you may remember from the last level, a special assessment is when additional taxes are levied on the homeowners in a neighborhood or area to pay for public improvements that directly benefit the people living there.
Special assessments can be voluntary or involuntary, and go towards paying for things like sidewalk improvements, street lights, and parks. These taxes are not permanent, and cease once they have been paid off.
Special assessments are divided among the property owners according to the benefit each will receive, and are often based on the front footage of a property.
While special assessment taxes are typically paid in installments over several years, property owners also have the option to pay the balance in full. Failing to pay a special assessment (even if you promise never to use that new sidewalk) can cause a lien to be put on your home.
Special Assessment
In Arizona, a community facilities district (CFD), is a taxing district similar to a special assessment that allows the financing of public improvements. These costs are financed with a 20-year bond, which is paid by the homeowners who benefit from the improvements.
It is important to note that the CFD charges are generally repaid through either ad valorem taxes levied upon each landowner’s property or special assessments placed upon each land owner’s property.
Sellers are required to disclose to buyers any existing CFD taxes. Upon the purchase of a resale home, the charge will pass to the new owner and will be reflected in the annual tax bill until it is paid off.
Community Facilities Districts
The People Who Ad Your Valorem
So where does this “assessed value” come from? The tax assessor, of course.
A tax assessor is an official who evaluates property and assigns a value to it for taxation purposes.
At its most simple, a property tax rate would work by a municipality determining their budgetary needs, a tax assessor determining the total assessed value of all property in the municipality, then dividing one by the other to come up with a tax rate.
Tax Assessors:
What is the difference between these three types of value, and what exactly do they mean? I’m glad you asked, Anthony. Let’s look over them together.
Full cash value (also known as market value) is the price that the assessor’s office believes the property would command in an open and competitive market. This could be lower or higher than the market value assigned to a property by a real estate agent.
Limited property value is calculated through a formula set by law, and is restricted on how much it may increase each year in order to help protect property owners. In Arizona, the maximum annual increase is 5% over the previous year’s limited value. Limited property value is what ultimately is used to determine annual property taxes, and the controlled increase is in place to help protect homeowners from being priced out of their homes due to large tax increases.
Assessed value is a percentage of the full cash value, which is calculated by multiplying the full cash value by the assessment rate, which will depend on the type of real estate.
Types of Valuation
In Arizona assessed value is calculated using the following ratios:
Commercial property: 18%
Vacant (raw) land: 15%
Rented residential property: 10%
Residential property: 10%
Assessment Rates in Arizona
In order to illustrate the differences between full cash value and limited property value, let’s take a look at an example. Anne purchased her dream home in Arizona four years ago in a popular neighborhood. Let’s check out her home values over the years.
Year 1
Anne’s home was assessed the first year she owned it as follows:
Full cash value: $450,000
Limited property value: $340,000
Year 2
The next year, Anne’s full cash value increased by around 7%, and her limited property value increased by the maximum 5% over the previous year.
Full cash value: $480,000
Limited property value: $357,000
Year 3
Within the past year, three new homes were built in Anne’s neighborhood, along with some retail developments nearby, causing her full cash value to increase quite a bit (around 8% over the previous year). However, her limited property value still only increased by the maximum of 5%.
Full cash value: $520,000
Limited property value: $374,850
Year 4
This year, the housing market softened a bit in Anne’s area. Her full cash value and her limited property value increased by around 3%.
Full cash value: $536,000
Limited property value: $386,096
As you can see, over four years, Anne’s full cash value of her home increased $70,000. However, the limited property value that she is taxed on increased $46,096 since the maximum increase is controlled.
Because of this, Anne can still comfortably afford to live in her dream home!
Scenario
In Arizona, each tax district must develop a budget in order to fund the services that it provides.
After the jurisdiction figures out how much money it needs, it analyzes all sources of revenue other than property taxes, such as revenue from state or federal aid, sales tax, and income tax. All of the revenues are subtracted from the budget requirements to determine how much property tax revenue is needed to meet the budget.
The number that remains is the tax levy, which is the amount of money that needs to be raised through property taxes. This tax levy amount is then divided by the assessed value for all taxable property in the tax district, also known as the tax base, using the following formula:
Tax levy budget ÷ Tax base =Tax rate
For example, if a district had a budget of $12 million and the tax base of the district was $350 million, the tax rate would be 3%.
Tax Rates in Arizona
In Arizona, tax rates are not expressed as percentages, but rather in dollars per $100 of assessed value, also known as mills. A mill is 1⁄1000 of a dollar, or .001. Another way to think of it is that for each mill in the tax rate, you’d pay $1 in tax per $1,000 in value.
To convert mills to a percent, move the decimal place one space to the left. So a county that has a millage rate of 20 mills is taxing people at 2%.
Still confused? Don’t worry! Shortly, we’ll go over how to calculate property tax step by step.
Millage Rates
Step 1: Find the Assessed Value
The first step to calculating ad valorem tax is to find the assessed value. In order to do this, you need two numbers: the limited property value and the assessment rate for the type of property being taxed. Do you remember the Arizona assessment rates that we discussed earlier? They are 10% for residential, 15% for vacant land, and 18% for commercial.
All we have to do is multiply these two variables together using the following formula (don’t forget to convert the percentage to a decimal!):
Limited property value x Assessment rate = Assessed value
Step 2: Find the Tax Rate
Next, it’s tax rate time! (We discussed this previously, but a little review never hurt anyone!) In order to calculate the tax rate, we need to know the tax levy budget and the tax base. Recall that the tax levy budget is the amount of funds needed from property taxes, and the tax base is the assessed value of all taxable real estate in the district.
Now, we just have to divide the tax base by the tax levy budget, and there you have it!
Tax levy budget ÷ Tax base =Tax rate
But wait – we aren’t done yet! Remember that tax rates in Arizona are not expressed in percentages, but in dollars per $100 of assessed value. All we need to do is multiply the tax rate by 100.
Tax rate x $100 = Price per $100 of assessed value
Step 3: Calculate the Tax Amount
The final step! Here, we are going to find the number of $100 units, or mills, that there are in the property’s assessed value. The formula we are going to use to find that is:
Assessed value ÷ 100 = Number of mills
Remember the assessed value we found in the first step? All we have to do is divide that number by 100. Once you have done that, the last thing to do is multiply the number of mills by the tax rate, which we converted to dollars per $100 of assessed value.
Number of mills x Tax rate = Tax amount
There you have it! Now let’s practice with a few scenarios.
How to Calculate Property Tax
Scenario: Tom’s Tucson Home
How exactly do each of these terms apply to taxation? Let’s practice. Tom needs to figure out the tax amount on his home in Tucson, but right now all he knows is that the limited property value of his home is $200,000. Let’s help him out!
Step 1: Find the Assessed Value
We know that Tom’s limited property value is $200,000, and we also know that residential property in Arizona has an assessment rate of 10%, which we convert to a decimal. Let’s calculate that assessment ratio by multiplying them together using this formula:
Limited property value x Assessment rate = Assessed value
We plug in the variables and get:
Answer: $200,000 x 0.10 = $20,000
Step 2: Find the Tax Rate
Next, let’s figure out Tom’s tax rate! To find that, let’s say his tax district has a tax levy of $9 million, and the tax base of the district is $200 million. Remember our formula from the previous page:
Tax levy budget ÷ Tax base = Tax rate
Now, let’s throw those variables in!
Answer: $9,000,000 ÷ $200,000,000 = 0.05
But wait – we aren’t done yet! Remember that tax rates in Arizona are not expressed in percentage rates, but in dollars per $100 of assessed value. This is easy, because all we need to do is multiply the tax rate by 100:
Tax rate x $100 = Price per $100 of assessed value
Now plug in those variables!
Answer: 0.05 x $100 = $5 per $100 of assessed value
Step 3: Calculate the Tax Amount
We are almost there! Next, we are going to find the number of $100 units, or mills, that there are for Tom’s house. The formula we are going to use to find that is:
Assessed value ÷ 100 = Number of mills
Remember Tom’s assessed value from Step 1? Let’s put it into this formula!
Answer: $20,000 ÷ 100 = 200 mills
So, Tom has 200 taxable mills for his home. One more step remains! Since the tax rate is $5 for each mill, all we need to do is multiply the number of mills by the tax rate using this formula:
Number of mills x Tax rate = Tax amount
Answer: 200 x $5 = $1,000
Final answer: Tom’s tax amount for his home is $1,000.
Scenario 2
Scenario: Phoebe’s Phoenix Pizzeria
Let’s practice one more time by calculating the tax amount for our friend Phoebe, who needs to find out her ad valorem tax for her restaurant in Phoenix, Fire in The Hole Pizzeria (you have to try their spicy pepperoni pizza).
Let’s go over what we know.
Full cash value: Phoebe’s current FCV is $740,000.
Limited property value: Phoebe’s current LPV is $500,000.
Tax levy: The tax levy for Phoebe’s district is $14 million.
Tax base: In Phoebe’s district, the tax base is $350 million.
Assessment rate: Phoebe’s property is commercial, so her assessment rate is 18%.
Step 1: Find the Assessed Value
We know that Phoebe’s limited property value is $500,000, and we also know that commercial property in Arizona has an assessment rate of 18%, which we will convert into a decimal.
Answer: $500,000 x 0.18 = $90,000
Step 2: Find the Tax Rate
Next, let’s figure out Phoebe’s tax rate! To find that, we just need to divide her district’s tax levy of $14 million by the tax base of the district, which is $350 million.
Answer: $14,000,000 ÷ $350,000,000 = 0.04
Now to find the tax rate, we just multiply this by $100 to find the price per $100 of assessed value.
Answer: 0.04 x $100 = $4 per $100 of assessed value
Step 3: Calculate the Tax Amount
We are almost there! Next, we are going to find the number of $100 units, or mills, that there are for Phoebe’s pizzeria by dividing the assessed value that we found in the first step by 100.
Answer: $90,000 ÷ 100 = 900 mills
Now, since the tax rate is $4 for each mill, all we need to do is multiply the number of mills by the tax rate.
Answer: 900 x $4 = $3,600
Final answer: Phoebe’s tax amount for her pizzeria is $3,600.Step 1: Find the Assessed Value
We know that Phoebe’s limited property value is $500,000, and we also know that commercial property in Arizona has an assessment rate of 18%, which we will convert into a decimal.
Answer: $500,000 x 0.18 = $90,000
Step 2: Find the Tax Rate
Next, let’s figure out Phoebe’s tax rate! To find that, we just need to divide her district’s tax levy of $14 million by the tax base of the district, which is $350 million.
Answer: $14,000,000 ÷ $350,000,000 = 0.04
Now to find the tax rate, we just multiply this by $100 to find the price per $100 of assessed value.
Answer: 0.04 x $100 = $4 per $100 of assessed value
Step 3: Calculate the Tax Amount
We are almost there! Next, we are going to find the number of $100 units, or mills, that there are for Phoebe’s pizzeria by dividing the assessed value that we found in the first step by 100.
Answer: $90,000 ÷ 100 = 900 mills
Now, since the tax rate is $4 for each mill, all we need to do is multiply the number of mills by the tax rate.
Answer: 900 x $4 = $3,600
Final answer: Phoebe’s tax amount for her pizzeria is $3,600.
Scenario
90,000 assessed value 0.04tax rate 4: price per 100 900=mills 3600.00=Tax Amount
Property taxes become a lien on a property on January 1, even though taxpayers do not receive the tax bill until late August or early September. This is because, in Arizona, property taxes are paid in arrears (after the fact).
In Arizona, tax payments are divided into two semiannual payments. The first half of the current year’s tax is due on October 1. The second half of the tax is due on March 1.
Delinquent Taxes
If property taxes are unpaid, they are considered delinquent. For the first half of the tax period, the delinquent date is November 1, and for the second half, it is May 1. An interest penalty of 16% per annum is charged until the delinquent taxes are paid.
If you have trouble remembering these due and delinquent dates, here is a helpful mnemonic phrase that you can use to jog your memory – Oh No, More Money!
Oh: October due date
No: November delinquent date
More: March due date
Money: May delinquent date
And if visual aids are more up your (memory) alley, here’s what those due and delinquent dates look like in a useful chart form!
Property Tax Payments
Arizona property taxes are levied annually but paid semi-annually (twice a year). If property taxes go unpaid, it can result in a lien against the property as of the first Monday in January. A property tax lien is a(n):
Specific lien. A specific lien is attached to a specific parcel of property. A general lien, on the other hand, attaches to any property, real or personal.
Involuntary lien. An involuntary lien is one that is created by law. A voluntary lien, on the other hand, is an obligation that someone chooses to take on, such as a mortgage loan.
Unrecorded lien. This is a lien that does not have to be recorded in the public records to be valid. In addition, the process of recording a document does not make it any more or less legal.
Lien Priority
In the event of foreclosure, an ad valorem property tax lien is the superior lien against the property. In order of priority, ad valorem tax liens are followed by special assessment liens and any other liens, in the order that they were recorded.
Because property tax liens are superior to all other liens, many lenders require borrowers to add property tax payments to their monthly mortgage obligation.
Removing a Tax Lien
A property that has a tax lien on it cannot be sold or transferred to another owner until the lien is removed. In order to remove a tax lien, one of the following must happen:
All taxes, penalties, interest, and fees are paid in full.
A buyer obtains the title to the property at a tax sale.
An error or omission must be proven that invalidates the lien.
Property Tax Liens
