Any property you own has value, but its specific value may differ for different purposes. Two of the most common valuations are a property's fair market value and its tax appraised value. Depending upon the state and county where the values are calculated, these valuations may be exactly the same or they may differ by thousands of dollars.
Fair Market Value
The fair market value of a home or property is the amount of money a buyer, seller or lender should expect it to sell for. It is determined by an official appraisal of the property. Usually, the appraiser compares the property to similar properties in the geographic area that have sold within the past year or two. The appraiser then takes into account the property's unique assets and liabilities (e.g., a property fence is usually an asset, while a single full bathroom in a multibedroom home is usually a liability) and adjusts the property's value up or down accordingly.
The tax appraised value of a home or property is a figure that county tax offices use to determine what a property owner's annual property tax will be. The county provides basic services to residents (e.g., fire and police service, road maintenance) which are paid for from the money collected from property taxes. Sometimes, local tax levies (such as for schools or county disability boards) are attached to property taxes, but the residents will first have had to approve the levy by simple majority vote in a local election. In most areas of the country, a property's tax appraised value is a straight percentage of its fair market value. This means, theoretically, that a property owner's tax should go up or down every year in accordance with the health of the local housing market. In practice, however, some counties have instituted an annual increase based upon an inflation index. Furthermore, since counties have to pay for property tax reappraisals, they often only have appraisals done every 5 or 10 years, or upon the sale of a property.
California&#039;s Proposition 13
Tax appraised value is calculated differently in California than in most other states. Proposition 13, which was passed in 1978, set specific limits on property taxes and property tax increases. California determined that a property's tax appraised value will be 100 percent of the property's fair market value, and an owner's annual tax bill is 1 percent of the fair market value. This means that a property with a fair market value of $250,000 will have a tax appraised value of $250,000 and an annual property tax of $2,500. In order to assure that a property owner does not receive a drastic increase in property tax from one year to the next, Proposition 13 further states that property tax cannot increase more than 2 percent each year. This means that even if a home doubles in value from one year to the next, the property tax can only increase a small amount. The only exception to this is upon sale of the home to a new owner, other than a spouse or family member. Once a property sells, its tax appraised value is reset to 100 percent of fair market value.
Reasons for a Fair Market Value Appraisal
If you are selling your property, you need to know what a fair listing price would be. A fair market value appraisal will determine this. If you are buying a property, a lending institution will insist upon an appraisal performed by a professional appraiser in order to confirm that the value of the property justifies the mortgage to be given on it. Similarly, if you wish to refinance your mortgage or get a home equity loan, a home equity line of credit or a business or cash loan where the property is offered as collateral, the lender will also require a professional appraisal.
Reasons for a Tax Appraised Valuation
Your property tax is tied to the property's fair market value. If your property's value has decreased due to the condition of the local housing market, you might want to have your property tax revised to reflect this. Furthermore, if your property suffered more than $10,000 damage due to a natural disaster, your property tax can be discounted. A reappraisal of the property is necessary to substantiate this.
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