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Property tax, or millage tax, is an ad valorem tax that an owner is required to pay on the value of the property being taxed. Property tax can be defined as "generally, tax imposed by municipalities upon owners of property within their jurisdiction based on the value of such property."There are three species or types of property: Land, Improvements to Land (immovable manmade objects; i.e., buildings), and Personal (movable manmade objects). Real estate, real property or realty are all terms for the combination of land and improvements. The taxing authority requires and/or performs an appraisal of the monetary value of the property, and tax is assessed in proportion to that value. Forms of property tax used vary between countries and jurisdictions.

The special assessment tax may often be confused with the property tax. These are two distinct forms of taxation: one (ad valorem tax) relies upon the fair market value of the property being taxed for justification, and the other (special assessment) relies upon a special enhancement called a "benefit" for its justification.

The property tax rate is often given as a percentage. It may also be expressed as a permille (amount of tax per thousand currency units of property value), which is also known as a millage rate or mill levy. (A mill is also one-thousandth of a currency unit.) To calculate the property tax, the authority will multiply the assessed value of the property by the mill rate and then divide by 1,000. For example, a property with an assessed value of US$ 50,000 located in a municipality with a mill rate of 20 mills would have a property tax bill of US$ 1,000 per year.[45555]

Countries

Australia

Australia has property taxes known as property or land rates. Land rates and frequency of payment are determined by local councils. Each council has land valuers who value the land's worth. The land's worth is the value of the land only; it does not include existing dwellings on the property. The assessed value of the land determines the total charges of rates. Rates can range from $100 per quarter to $1,000 per quarter depending on the location and value of the land. Quarterly payments are common, but frequency varies by locality. Australian property owners also pay water rates. Some councils include this in the total of the rates notice and provide a breakdown of water and land charges. Other councils may charge this separately. Water rates are not a flat fee; charges depend on usage. Prospective buyers can get details about land and water rates from the local council before purchase.

Canada

Many provinces in Canada levy property tax on real estate based upon the current use and value of the land and this is the major source of revenue for most municipal governments in Canada. While property tax levels vary among municipalities in a province there is usually common property assessment or valuation criteria laid out in provincial legislation. There is a trend to use a market value standard for valuation purposes in most provinces with varying revaluation cycles. A number of provinces have established an annual reassessment cycle where market activity warrants while others have longer periods between valuation periods.

Hong Kong

In Hong Kong , there is a kind of tax named a property tax, but it is not an ad valorem tax; it is actually classified as an income tax.

According to HK Inland Revenue Ordinance IRO s5B, all property owners shall not be subject to this tax; unless the HK property owner has received a consideration, the example is rental income for the year of assessment. The property tax shall be computed on the net assessable value at the standard rate.

Year of Assessment

The period of assessment is from April 1 to March 31 of the following year.

Net assessable value

The formula is:

Net assessable value = 80% of Assessable value.


HK property tax payable = Net assessment value X Property tax standard rate


Assessable value = Rental income + Premium + (Rental bad debt recovered - Irrecoverable rent) - Rates paid by owner.


See also



Jamaica

This tax is paid in the same way as a mortgage, an annual payment depending on the value of one's assets, such as property.

India

Property tax or 'house tax' is a local tax on buildings, along with appurtenant land, and imposed on owners. It resembles the US-type wealth tax and differs from the excise-type UK rate. The tax power is vested in the states and it is delegated by law to the local bodies, specifying the valuation method, rate band, and collection procedures. The tax base is the annual ratable value (ARV) or area-based rating. Owner-occupied and other properties not producing rent are assessed on cost and then converted into ARV by applying a percentage of cost, usually six percent. Vacant land is generally exempt. Central government properties are exempt. Instead a 'service charge' is permissible under executive order. Properties of foreign missions also enjoy tax exemption without an insistence for reciprocity. The tax is usually accompanied by a number of service taxes, e.g., water tax, drainage tax, conservancy (sanitation) tax, lighting tax, all using the same tax base. The rate structure is flat on rural (panchayat) properties, but in the urban (municipal) areas it is mildly progressive with about 80% of assessments falling in the first two slabs. By all accounts, the property tax is under-utilised in the municipalities and not effectively used in the panchayats, mainly due to tax payer resistance.

Netherlands

Property tax (Dutch: Onroerend goed belasting or Onroerende zaak belasting (OZB) ) is levied on homes on a municipal basis in two parts: for the one who lives in the house, and for the owner of the house. When one has a rental home, he/she should only pay the living part of the tax.

United Kingdom

There is currently no ad valorem tax on residential property. Two former systems were dropped because of their extreme unpopularity. They were
  • Schedule A income tax, a central government tax that was levied on the imputed rent, that is the rent that owner-occupiers of land would have been receiving from a tenant had they not been living in the houses they owned. However, actual (as opposed to imputed) rent is still subject to income tax under Schedule A;
  • Rates, a local government tax that was levied in proportion to the assessed value of property. This was replaced under the Thatcher government by a poll tax, which proved even more unpopular than the rates, and was replaced by a mixed council tax which combines elements of property tax and a poll tax. Rates are still (2006) levied on business property, though some classes of business are exempt.


United States

In the United Statesmarker, property tax on real estate is usually levied by local government, at the municipal or county level.

The assessment is made up of two components—the improvement or building value, and the land or site value. In some states, personal property is also taxed. A tax assessor is a public official who determines the value of real property for the purpose of apportioning the tax levy. An appraiser may work for government or private industry and may determine the value of real property for any purpose.

When assessing a residence, the appraiser investigates the selling prices of all other similar houses in the county, the cost of replacing it if it gets destroyed, and the most appropriate price that the house should sell for. Then, the appraiser assigns a value which typically lies within this calculated range.

Tax assessor offices maintain inventory information about improvements to real estate. They also create and maintain tax maps. This is accomplished with the help of surveyors. On tax maps, individual properties are shown and given unique parcel identifiers (commonly called Assessor's Parcel Numbers, or APNs). The tax maps help to ensure that no properties are omitted from the tax rolls and that no properties are taxed more than once. Real property taxes are usually collected by an official other than the assessor. One example of proposed reform is to create a "two-rate" property and land value tax.

The assessment of an individual piece of real estate may be according to one or more of the normally accepted methods of valuation (i.e. income approach, market value or replacement cost). Assessments may be given at 100 percent of value or at some lesser percentage. In most if not all assessment jurisdictions, the determination of value made by the assessor is subject to some sort of administrative or judicial review, if the appeal is instituted by the property owner.

Ad valorem (of value) property taxes are based on fair market property values of individual estates. A local tax assessor then applies an established assessment rate to the fair market value. By multiplying the tax rate x against the assessed value of the property, a tax due is calculated.

Property taxes are imposed by counties, municipalities, and school districts, where the millage rate is usually determined by county commissioners, city council members, and school board members, respectively. The taxes fund budgets for schools, police, fire stations, hospitals, garbage disposal, sewers, road and sidewalk maintenance, parks, libraries, and miscellaneous expenditures.

Relatively recently, US property tax rates increased well above similar rates in other countries , and exceeded 5% in some US states, thus becoming the main dwelling expense after construction.

Property taxes were once a major source of revenue at the state level, particularly prior to 1900, which was before states switched to relying upon income tax and sales tax as their main sources of revenue.

After determining a budget at the municipal level, a legislative appropriation determines how the monies will be collected and distributed. After that, a tax authority levies the tax. An appeal is permitted. Equalization is then considered by a board of equalizers to assure fair treatment. Then a tax rate is determined by dividing the municipal budget by the assessment role of that municipality. Multiplying tax rate by the assessed value of one's property determines one's tax rate.

Some jurisdictions have both ad valorem and non-ad valorem property taxes (better known as special assessments). The latter come in the form of a fixed charge (regardless of the value of the underlying property) for items such as street lighting and storm sewer control.

In the United States, another form of property tax is the personal property tax, which can target

In some states, it is permissible to separate the real estate tax into two separate taxes—one the land value and one on the building value. (See Land Value Taxation.)

Personal property taxes can be assessed at almost any level of government, though they are perhaps most commonly assessed by states.

Some exemptions are available to homeowners in certain counties. In California, some counties, such as Los Angeles, Ventura, and San Diego, offer a homeowners exemption for property owners that live in the home.

In Texas, property taxes are used to fund public school districts.

Effects

Sprawl

In the absence of urban planning policies, property tax on real estate changes the incentives for developing land, which in turn affects land use patterns. One of the main concerns is whether or not it encourages urban sprawl.

The market value of undeveloped real estate reflects a property's current use as well as its development potential. As a city expands, relatively cheap and undeveloped lands (such as farms, ranches, private conservation parks, etc.) increase in value as neighboring areas are developed into retail, industrial, or residential units. This raises the land value, which increases the property tax that must be paid on agricultural land, but does not increase the amount of revenue per land area available to the owner. This, along with a higher sale price, increases the incentive to rent or sell agricultural land to developers. On the other hand, a property owner who develops a parcel must thereafter pay a higher tax, based on the value of the improvements. This makes the development less attractive than it would otherwise be. Overall, these effects result in lower density development, which tends to increase sprawl.

Attempts to reduce the impact of property taxes on sprawl include:
  • Land value taxation - This method separates the value of a given property into its actual components - land value and improvement value. A gradually lower and lower tax is levied on the improvement value and a higher tax is levied on the land value to insure revenue-neutrality. This method is also known as two-tiered or split-rate taxation.
  • Current-use valuation - This method assesses the value of a given property based only upon its current use. Much like land value taxation, this reduces the effect of city encroachment.
  • Conservation easements - The property owner adds a restriction to the property prohibiting future development. This effectively removes the development potential as a factor in the property taxes.
  • Exemptions - Exempting favored classes of real estate (such as farms, ranches, cemeteries or private conservation parks) from the property tax altogether or assesing their value at a very minimal amount (for example, $1 per acre).
  • Forcing higher density housing - In the Portland, Oregonmarker area (for example), local municipalities are often forced to accept higher density housing with small lot sizes. This is governed by a multi-county development control board, in Portland's case Metro.
  • Urban growth boundary or Green belt - Government declares some land undevelopable until a date in the future. This forces regional development back into the urban core, increasing density but also land and housing prices. It may also cause development to skip over the restricted-use zone, to occur in more distant areas, or to move to other cities.


Distributional

Property tax has been thought, by some, to be regressive (that is, to fall disproportionately on those of lower income) when not correctly implemented because of its impact on particular low-income/high-asset groups such as pensioners and farmers in drought years. Because these persons have high-assets accumulated over time, they have a high property tax liability, although their realized income is low. Therefore, a larger proportion of their income goes to paying the tax. In areas with speculative land appreciation (such as California in the 1970s and 2000s), there may be little or no relationship between property taxes and a homeowner's ability to pay them short of selling the property.[45556] This issue was a common argument used by supporters of such measures as California Proposition 13 or Oregon Ballot Measure 5; some economists have even called for the abolition of property taxes altogether, to be replaced by income taxes, consumption taxes such as Europe's VAT, or a combination of both.

Others, however, have argued that property taxes are broadly progressive, since people of higher incomes are disproportionately likely to own more valuable property. In addition, while nearly all households have some income, nearly a third of households own no real estate. Moreover, the most valuable properties are owned by corporations not individuals. Hence, property is more maldistributed than income.

It has been suggested that these two beliefs are not incompatible - it is possible for a tax to be progressive in general but to be regressive in relation to minority groups. However, although not direct, and not likely one-to-one, property renters can be subject to property taxes as well. If the tax reduces the supply of housing units, then it will increase the rental price. In this way, the owner's cost of taxation is passed on to the renter (occupant).

Progressive policies

As property increases in value the possibility exists that new buyers might pay taxes on outdated values thus placing an unfair burden on the rest of the property owners. To correct this imbalance municipalities periodically revalue property. Revaluation produces an up to date value to be used in determination of the tax rate necessary to produce the required tax levy.

A consequence of this is that existing owners are reassessed as well as new owners and thus are required to pay taxes on property the value of which is determined by market forces, such as gentrification in low income areas of a city. In an effort to relieve the frequently large tax burdens on existing owners, particularly those with fixed incomes such as the elderly and those who have lost their jobs, communities have introduced exemptions.

In some states, laws provide for exemptions (typically called homestead exemptions) and/or limits on the percentage increase in tax, which limit the yearly increase in property tax so that owner-occupants are not "taxed out of their homes". Generally, these exemptions and ceilings are available only to property owners who use their property as their principal residence. Homestead exemptions generally cannot be claimed on investment properties and second homes. When a homesteaded property changes ownership, the property tax often rises sharply and the property's sale price may become the basis for new exemptions and limits available to the new owner-occupant.

Homestead exemptions increase the complexity of property tax collection and sometimes provide an easy opportunity for people who own several properties to benefit from tax credits to which they are not entitled. Since there is no national database that links home ownership with Social Security numbers, landlords sometimes gain homestead tax credits by claiming multiple properties in different states, and even their own state, as their "principal residence", while only one property is truly their residence.[45557] In 2005, several US Senators and Congressmen were found to have erroneously claimed "second homes" in the greater Washington, D.C. area as their "principal residences", giving them property tax credits to which they were not entitled.[45558][45559]

Undeserved homestead exemption credits became so ubiquitous in the state of Maryland that a law was passed in the 2007 legislative session to require validation of principal residence status through the use of a social security number matching system.[45560] The bill passed unanimously in the Maryland House of Delegates and Senate and was signed into law by the Governor.[45561]

The fairness of property tax collection and distribution is a hotly-debated topic. Some people feel school systems would be more uniform if the taxes were collected and distributed at a state level, thereby equalising the funding of school districts. Others are reluctant to have a higher level of government determine the rates and allocations, preferring to leave the decisions to government levels "closer to the people."

In Rhode Island efforts are being made to modify revaluation practices to preserve the major benefit of property taxation, the reliability of tax revenue, while providing for what some view as a correction of the unfair distribution of tax burdens on existing owners of property.[45562]

The Supreme Courtmarker has held that Congress can directly tax land ownership so long as the tax is apportioned among the states based upon representation/population. In an apportioned land tax, each state would have its own rate of taxation sufficient to raise its pro-rata share of the total revenue to be financed by a land tax. So, for example, if State A has 5% of the population, the State A would collect and remit to the Federal government such tax revenue that equals 5% of the revenue sought. Such an apportioned tax on land had been used on many occasions up through the Civil War.

Indirect taxes on the transfer of land are permitted without apportionment: in the past, this has taken the form of requiring revenue stamps to be affixed to deeds and mortgages, but these are no longer required by federal law. Under the Internal Revenue Code, the government realizes a substantial amount of revenue from income taxes on capital gains from the sale of land, and in estate taxes from the passage of property (including land) upon the death of its owner.

The Supreme Court has not directly ruled on the question of whether Congress may impose an unapportioned tax on the "privilege" of owning land with the "measure" of the tax being the value of the land.

Milton Friedman noted that "[T]he property tax is one of the least bad taxes, because it’s levied on something that cannot be produced — that part that is levied on the land".

See also



References



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