Paying taxes is unavoidable in making money, whether you earn income through wages or investments. However, investors can seek to manage their tax liabilities through various means, including deferral. One valuable tool is understanding the different taxes, how they apply to your investment holdings, and how the tax amount is determined.
The assessed value is the value of a piece of property as determined for tax purposes. The government tax assessor decides that value and, in turn, determines the amount of the tax levied. Most property taxes are assessed locally, and each tax agency can use individual methods for determining the value. Of course, most use similar factors, like comparable sales, replacement cost, and income the property is generating.
While property taxes are locally collected, each state typically determines how they are handled. In most cases, the total value of a property is discounted to determine the assessed value. However, in many states, the assessed value of a property or assessment rate is limited, and annual increases are statutorily prescribed. For example, in California, a 1978 ballot measure restricted the imposition of property taxes to one percent of the asset’s value. Further, the assessed value can only increase by two percent annually unless the property is sold, at which time the new value is assessed according to the sale price.
In contrast, New Jersey has a property tax rate of 2.2 percent, spotlighting the Garden State's high property values. Illinois has a rate of 2.05 percent but noticeably lower prices. On the other end of the spectrum, while Hawaii has sky-high housing prices, the property tax rate is 0.31, below even Alabama at 0.37 percent.
Can’t You Deduct the Property Taxes Anyway?
Typically, yes. For personal residential property, the Tax Cuts and Jobs Act limited the deduction amount, adversely impacting taxpayers in high-tax states who could no longer fully deduct their state and local taxes from federal income tax. Property taxes are an expense for investors, and operating expenses are generally deductible. Other deductible expenses include interest, maintenance, utilities, repairs, insurance, and more.
How Does the Assessed Value Affect the Estate Tax?
A property’s assessed value is included in determining a taxpayer's total estate value, along with other assets like cash, securities, and business holdings. The federal estate tax will be applied if the estate is valued at more than 11.7 million dollars. However, due to the increases in that threshold, only a tiny portion of estates pay any tax at the federal level. Twelve states have their own estate taxes, and six others have inheritance taxes, which may have a similar effect of diminishing the value of an inheritance. In almost every state with such levies, there are exceptions for close family heirs.
