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Real Estate Taxes

Posted by attorney Matthew Quick

Real estate taxes are the main source of revenue for local municipalities, which are used to provide benefits and services such as schools, community colleges, police and fire departments, health care facilities, museums, water and sewer, roads and sidewalks, parks, libraries and so forth. Real estate taxes are calculated using the value of the property, which is called an ad valorem (according to worth) tax. Once the value of a parcel is established, a tax rate is applied, thus yielding the property tax owed. Determining the value of a piece of land (also referred to as a “parcel" or “tract") and levying the appropriate tax is a process that involves several factors.

For administrative purposes, a property identification number (referred to as a “PIN") is initially given to each piece of land (usually a 10 to 14 digit number), allowing land and tax records to be easily identified and transferred between municipal departments. Then, to figure the value of the parcel, an assessment is performed by the county or city assessor, who is a public official that appraises the property. The property assessment may be according to one or more appraisal methods, such as market value, replacement cost or income value. In Illinois, parcels are assessed every three to four years; in Michigan, parcels are assessed upon transfer and the assessed values are increased annually by an appreciation factor (the lesser of either the rate of inflation or 5%).

While some municipalities assess the property at its full value, others determine the taxable value of a parcel based upon a percentage. The determination of the assessor as to the taxable value of a parcel of property may be appealed by the property owner, typically within a limited timeframe.

In Michigan, after the property is assessed, there are no further calculations to determine the taxable value. However, after the property is assessed in Illinois, the calculations can get tricky by including such figures as an established assessment rate and state equalization factor, which are set by the county and state (basically, a means to manipulate property taxes without changing the property’s assessed value).

When the taxable value of the property is determined, the tax rate is then applied to determine the amount of tax owed. In Michigan, the taxes are levied as a millage rate, which is equal to 1/1000th of a dollar. Thus, to figure tax on a millage rate of 4.19, simply multiply .00419 by the taxable value of the property. On the other hand, Illinois property taxes are computed on a percentage basis of the taxable value of the property. Additionally, some exemptions are available to homeowners, seniors, veterans and the like, which are dollar for dollar reductions in the amount of tax owed.

When buying or selling property, prorating property taxes is an issue. In Illinois, property taxes are paid in arrears, which means that 2009 taxes are due this year. Therefore, the seller will pay the buyer for the days the seller spent occupying the property that have not yet been paid. In Michigan, however, taxes are paid in advance, which means the buyer will pay the seller for the days the buyer will spend occupying the property that have already been paid.

Property taxes vary in each municipality, be it by tax rate or mode of assessment. Because property taxes represent a substantial expense for property owners, each property tax bill should be independently examined to ensure it is accurate. If there are any questions regarding the accuracy of a tax bill, do not hesitate to contact the assessor, treasurer or a property tax professional.

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