Assessing Real Property For Taxation Purposes

The State Department of Assessments and Taxation (SDAT) has appointed a workgroup composed of state and local representatives to examine the property assessment process in Maryland.  Two areas of focus include whether the physical inspection of property is necessary to assess property and whether changes in property status and new properties are being picked up timely and added to the tax rolls. To assist with making recommendations in these areas, the workgroup was briefed on the property assessment process at the previous meeting.

SDAT is responsible for the assessment of real and personal property for taxation purposes. This blog post will focus on the process for real property assessments.  The personal property assessment process will be discussed in a future post.

Process Overview

In Maryland, real property, land and improvements to land, is assessed on a three-year cycle in which a third of properties in each jurisdiction are assessed each year. Any increase in assessed value is then phased-in over a three-year period to reduce the financial impact on the taxpayer. The financial impact on owner-occupied property is further reduced by counties imposing a cap on the annual assessment increase. This is known as the Homestead Tax Credit. Local jurisdictions are required to limit taxable assessment increases to 10% or less each year. Each jurisdiction has the authority to set its own cap for assessment purposes.

Assessments notices are sent by SDAT to taxpayers in early January. SDAT then certifies assessments to the local jurisdictions where the local tax rate is applied to convert the assessment into a tax bill.  Tax bills are sent to homeowners each July corresponding with the beginning of the fiscal year.

Goal of the Assessment Process

Article 15 of the Declaration of Rights of Maryland’s Constitution requires that all property be assessed and taxed uniformly.  State law requires all taxable property to be assessed based on its fair market value.

Approaches to Determine Fair Market Value

An assessment is based on an appraisal of the fair market value of the property. Assessors are the appraisers who estimate that value. There are three accepted approaches for calculating fair market value: 1) the sales approach; 2) the cost approach; and 3) the income approach.  Assessors use the  sales and cost approach to estimate fair market value of residential properties.  The income approach is used for properties that produce an income stream from rent or lease agreements.

The SDAT website describes both of these approaches.

THE SALES APPROACH

The premise of the sales approach is that the fair market value of a given property (called the subject property) may be determined by examining the sale prices of comparable properties. If similar properties sold for approximately $100,000, it could be assumed that other comparable properties would sell in the $100,000 range. The key to the sales approach is comparability and the availability of sufficient data.

COST APPROACH

The premise of the cost approach is that the fair market value of a given property equals the total of the cost to construct a similar improvement, less any depreciation for age and condition, and the price of the land. For example, if the cost to construct an 1,800 square foot rancher is $70,000, the cost approach assumes that a prospective purchaser would not pay more than $70,000, plus the cost of the land, for a home which is already built. If the existing house were not new, it may sell for less than $70,000. In general, the older the house, the greater the loss in value due to depreciation. A house which is 10 years old will usually sell for less than a comparable house which was recently built.

Assessors use a blend of these two approaches to appraise residential property.  This appraisal information is included in the assessment notices that property owners receive in January of each year.

Additional information on the real property assessment process can be found on SDAT’s website.

Information on the Property Assessment Workgroup appointed by SDAT can be found on Conduit Street.

 

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