Agribusiness Library

LESSON L060057: PROPERTY TAXES

Objectives1. Define property, describe the kinds of property, and define property tax.

2. Describe how property value is assessed, and determine the role of an assessor.

3. Explain guidelines for the assessment of farmland, and describe how buildings change agricultural property value.

4. Describe the property tax cycle, and explain who to contact if you have issues with any step in the process.

Terms•Assessor•Depreciation•Economic obsolescence•Functional obsolescence•Intangible personal property•Personal property•Physical deterioration•Productivity indexes•Property

•Property tax

•Real property

•Tangible personal property

Property is any object (e.g., land, automobiles, or houses) or right that can be owned.

Ownership involves the right to use or the prevention of others being able to use and sell or dispose of possessions.

Possession implies protection of all these rights by law.

A. Real property is the land, anything firmly attached to its surface (e.g., houses, other buildings, fences, landscaping, driveways, and trees) and all the minerals associated with the property.

B. Personal property is any property that is not considered real property; it is a moveable and often human-made object.

It can be divided into tangible and intangible property. 1. Tangible personal property is property

that physically exists and can be felt or touched. Examples of tangible property include livestock, cars,

furniture, household goods, etc. 2. Intangible personal property is property that cannot be

seen or touched. Examples of intangible property include cash, accounts

receivable, patents, and trademarks.

C. In the United States and several other countries, landowners are required to pay property tax.

A property tax is a tax levied on real estate, which includes land and permanent improvements made to land. 1. In some states, personal property (e.g., automobiles,

machinery, and boats) is also taxed. 2. Property taxes are the primary source of

revenue for counties, cities, and school districts. So county board members, city council members,

and school board members set the property tax levy rate.

Property tax is paid annually based on the value of land and permanent buildings.

The value of the land and any improvements to the land is determined by an assessor. An assessor is an elected or appointed individual who

determines the value of all real property in his or her assessment area (e.g., a county) for the purpose of establishing the tax levy.

The property owner can appeal the assigned property value through an administrative or judicial review.

A cost approach, market value method, or income approach may be used to determine the market value of a piece of property.

A. The cost approach appraisal estimates the cost to build a like building at current material prices and accounts for depreciation and the value of the land on which the building sits.

B. The market value method estimates the value of a property by comparing it to like properties that have recently sold on the market.

C. The income approach estimates the annual income that the property is capable of producing and then determines the total value of a property based on that information. The income approach may be used with properties such as

residential rental properties.

The assessment of farmland is based upon net income to the farm according to the land productivity and use.

The assessed value can be impacted by the value of buildings on the property.

A. The use of the land is determined based on two major findings. The first is through the use of soil maps, which are pictures

taken from aerial views that are labeled with soil types. The second is determined with productivity indexes —records

of how productive the land has been based on the production acquired from it as well as soil types, slopes, erosion, and subsoil conditions.

In addition to these two major categories, all other available data is considered.

Since farmland is separated into four different categories, assessment is made considering a specific contributory value. 1. Cropland, or land from which crops

are harvested, is the first category. All land in orchards, citrus groves,

vineyards, and nursery greenhouse uses, rotational pasture, and land that could have been used for crops without additional improvements is considered cropland.

It is assessed based on the productivity index (PI). Since the land is used to grow crops, it is important to take

the value of the soil into consideration when identifying an appraisal.

2. Permanent pasture (land that is not woodland or that is not used as a rotational pasture but is used for pasturing animals) is also based on the productivity index. The land is assessed on PI because the quality of soil will

determine the quality of feed the animals on the pasture are receiving.

3. Other farmland or land including woodland pasture, woodland, deforested land, and farm building lots (other than home sites) are also based on PI.

4. Wasteland (land that is not put into cropland, permanent pasture, or other farmland as the result of soil limitations and not as the result of management decisions) is assessed according to its contributory value to the farm, if there is one. If there is not one, a zero assessment is recommended.

B. The final component in the assessment of farm real estate is putting a value on the buildings to determine tax adjustment.

The law requires farm buildings that contribute to the farm to be assessed as part of the farm.

The value is based on current use of the buildings and their contribution to the farm.

An assessor must consider many things when assigning a value to a building, such as depreciation. Depreciation is the difference between the cost of actually

replacing a building and its current value. Buildings are built to increase efficiency and productivity. However, as buildings age, the cost of building the same thing

new may change drastically.

Depreciation can be seen in the forms of physical deterioration, functional obsolescence, or economic obsolescence. 1. Physical deterioration is a loss in the

physical ability of a building to withstand normal use. It may result from use, wear and tear, structural defects, and

decay. 2. Functional obsolescence is a loss in value due to

characteristics of the building that cause a failure of the building to serve its intended purpose. Functional losses cause the buildings to be less useful and,

therefore, less desirable.

3. Economic obsolescence is a loss in a farm building’s value because of a farm’s economic environment. It may be due to several factors,

including land-use changes and market conditions.

All of these factors are observed during the inspection of the property.

After all the necessary information is collected, cost tables are used to put a correct value on buildings.

The property assessment and property tax levy procedures vary from state to state and may vary slightly from county to county. But generally, the property tax

cycle includes the following steps: assessment, review and appeal of assessment decisions, state equalization, establishment of budgets, tax rate determination, and collection of property tax payments.

A. Assessment: In this step, property is discovered, listed, and appraised by local assessor officials.

B. Review and appeal of assessment decisions: In this step, county boards of review determine if local assessors have calculated assessed values correctly. Property assessments may be

equalized by a county assessment officer.

In the equalization process, the county assessment officer may increase or decrease assessments to equalize assessments within the county at market value.

This is also the step in which property owners or local taxing officials can appeal unreasonably low or high assessments.

C. State equalization: In this step, the states equalize assessments among counties, which ensures that all property in the state is appraised at the same ratio.

D. Establishment of budgets: In this step, the taxing districts (e.g., school district) determines the amount of revenues needed from property taxes.

E. Tax rate determination: In this step, county officials calculate the tax rate needed to generate the revenues that each taxing district can legally levy.

F. Collection of property tax payments: In this step, property tax bills are prepared and sent. Also, payments are collected from property owners.

REVIEW•What is property? What the difference between real property and personal property? What is property tax?

•How is property value assessed? What is the role of an assessor?

REVIEW•How is farmland value assessed? How do buildings change property tax amounts?

•What are the general steps involved in the property tax cycle? Who should be contacted in the event of a problem?