Understanding (and Fixing) Property Tax Assessment

Imagine, if you will, Tinyville, a community of only ten houses. All ten houses were the same size and style, built at the same time on similarly-sized lots, using similar architectural drawings and building materials, each with comparable views and amenities, and each sold to its initial owner for the same price, $250,000.

Assuming the fair market value of each of these houses was $250,000, (because after a reasonable amount of time that's the price at which the sellers and buyers had meetings of the minds, neither being under duress,) Tinyville's tax assessor valued each property at $250,000, resulting in an underlying total property value of $2.5M for all of Tinyville. Like any municipality, Tinyville has expenses: police & fire departments, schools & libraries, water & sewer, sanitation workers, judges & clerks, engineers & inspectors, tax assessors & collectors, officials, and secretaries.

To keep the math simple, let's imagine that Tinyville's annual budget is a mere $100,000, and that it has no other sources of revenue (such as parking meters, local sales or income taxes, or hunting/fishing permits). In order to meet its annual expenses, Tinyville's tax assessor divides its $100,000 of budgeted expenses (known as a total tax levy) by each property's proportionate share of the $2.5M total assessed value of the community. Dividing $250,000 by $2.5M means that each house is responsible for 10% of Tinyville's property tax levy. Each homeowner (or their mortgage bank) gets a tax bill for $10,000. For years, everyone is happy in Tinyville.

The families each have kids in Tinyville's schools, they march in Tinyville's parades, and compete in Tinyville's pie-eating contests. In the natural course of events, two of the original families were more prosperous than others and moved into better digs in Mediumville, one retired to Southville, one got transferred to his company's office in Westville, and one died in a tragic car accident, but their heirs in Bigville didn't want to move back to their family homestead.

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Anyway, five of the homes went on the market and because the market had been doing well for the past several years, four were sold for $300,000... except the one belonging to the heirs of the deceased couple - they let the house fall into disrepair, stopped mowing the lawn, and eventually squatters moved in and started trashing the place. When they finally sold it as a "handyman special," they got $150,000 for it.

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