How Your House Is Assessed

Contents
Introduction
Indiana's Assessment Standard
Three Assessment Methods
An Assessment Record
Class and Property Number
Parcel Information
Valuing the Characteristics of Property
Remodeling
Adjustments to Replacement Cost
Neighborhood Factor
Value of Land
Total Value of Land and Improvements

Introduction
Each year the Indiana County Treasurers send property tax bills to property owners. To calculate how much each property owner owes, the tax rate is multiplied by the assessed value of the taxpayer's property. The assessed value is determined by the township and county assessors.

Since the assessed value is the starting point for calculating the taxes you owe, understanding how your property is assessed helps explain how your tax bill is calculated. This topic explains the assessment methods used to value a house in Tippecanoe County, Indiana.

It might be useful to read this topic, about how property is assessed, then the topic on assessment notices, then the topic on tax bills. These three topics provide an overview of Indiana property taxes, from the taxpayer's point of view.

Indiana's Assessment Standard
The "base" of the property tax differs from other taxes. The tax base of the sales tax, for example, is the prices of taxable goods and services that are sold. In the normal course of business, retailer accounts provide a record of the value of sales to be taxed. The tax base of the individual income tax is income. In the normal course of business, taxpayers receive pay stubs and employers keep payroll records. This provides a record of the value of income to be taxed.

The tax base of the property tax is the value of property. Certainly, in the normal course of business many properties sell each year. The sales prices could provide a record of the value to be taxed. But most properties do not sell each year. Some don't sell for decades at a time. The normal course of business produces no record that taxpayers or governments can use to measure the value of all of the property to be taxed.

State and local governments solve this problem by hiring property assessors to measure the value of all taxable property. Assessors must estimate the values using a set of methods to achieve values that are consistent with an assessment standard.

Indiana's assessment standard is effectively market value. This means that Indiana assessors value property for tax purposes based on what the property could bring if it were sold in an "arms-length" transaction. The International Association of Assessing Officials defines market value this way:

Market value is the most probable price expressed in terms of money that a property would bring if exposed for sale in the open market in an arm's length transaction between a willing seller and a willing buyer, both of whom are knowledgeable concerning all the uses to which it is adapted and for which it is capable of being used.  

Indiana property assessments are predictions of what a property would bring if it were sold. Assessments are based on predicted selling price.

Three Assessment Methods
There are three methods that assessors use to value property based on market value.

The sales comparison method compares the characteristics of properties, and values those that did not sell based on the prices of similar properties that did sell. The sales comparison method is preferred for properties that have frequent sales, and are relatively “homogeneous,” that is, all have similar characteristics. Residential property, some commercial property and vacant land are often assessed using the sales comparison method.

The replacement cost less depreciation method adds up the costs of the materials, equipment and labor required to build a structure, subtracts depreciation, and adds the value of land. Resulting values are usually adjusted upward or downward by county, region or property type, to reflect regional variations in construction costs and the supply of and demand for property. These adjustments are derived by comparing sales prices to the replacement cost estimates of sold properties, or by using other cost indexes. The replacement cost less depreciation method is preferred for property that is unique (that is, not homogeneous), or not frequently sold. Complex manufacturing and commercial property is often assessed using this method. It is also frequently used for residential and simpler commercial property, and in some states it is the only method used.

The income capitalization method estimates sales prices by dividing the net rent or income earned on a property by a rate of return. This method is based on the idea that investors will demand a rate of return on property comparable to rates earned on other assets. An investor will look at the income or rent that can be earned from a property, and offer a price which makes the rate of return comparable to those on stocks, bonds or bank accounts. The income capitalization method is often used for properties that are rented, mostly residential apartments and rented business property. A version of this method is used for agricultural land.

Residential property is valued using the replacement cost less depreciation method in most counties in Indiana. The main reason for this is that Indiana has just recently adopted market value as its assessment standard. The old "true tax value" assessment standard was based on a replacement cost less depreciation method, but one that did not take account of sales prices. Assessors needed to move from the old to new standards quickly, and most modified their existing methods to account for sales prices. It may be that, in future reassessments, some counties will adopt the comparative sales method for residential assessment.

The Department of Local Government Finance is the state agency that oversees property assessment in Indiana. The DLGF is responsible for providing guidance and education to local assessors on proper assessing methods. It is also responsible for measuring the results of local assessment efforts, and helping local assessors make corrections where needed. For the last reassessment in 2002-03, the DLGF provided a short assessment manual, that described the assessment standard and suggested methods that might be used to meet this standard. The DLGF also provided a much longer set of assessment guidelines, which described in detail the replacement cost less depreciation method.

Note that these provide guidance for real property assessment. Real property is land and buildings. Some personal property is also subject to property taxes, mostly business depreciable equipment. Since your house is real property, this topic will focus on real property assessment.

An Assessment Record
Assessment records are kept in different ways in different counties. The county or township assessor may have hundreds of drawers full of cards containing information about the characteristics and value of the county's taxable property. Or, all of this information may be in a computer data base. Some counties use both.

Tippecanoe County, for example, keeps property record cards in drawers, and has a computer data base with assessment information. Here's a printout from the data base, showing the details for the assessment of a house in Tippecanoe County. Again, every county is a bit different in how this data is kept. Your printout may look different. Your county may not have printouts, in which case your property record card will look quite different than this. Every county must keep this information in some form, though.

Run your cursor over this printout.  You can click on the parts where your cursor shows a link, to see an explanation of what it means.  Or you can scroll down to read about it.

Class and Property Number
Indiana has a numbering system to classify different types of property. Number 510 is a one family dwelling on a "platted lot," which means it is on land that has been subdivided for sale. That's what this house is.

Numbers in the 100's are agricultural, in the 200's are minerals, in the 300's are industrial, in the 400's commercial. The numbers can get very specific. Number 464, for example, designates bowling alleys.

The property number could be useful if you have questions for the assessor, because it will be the way the property is identified in the county's computer data base.  The assessor probably will ask you for this number to help answer your questions. In Tippecanoe County, the first three digits identify the "tax district" where the property is located. That identifies the property tax rate used to calculate this property's tax bill. Each county has its own numbering system, however.

Parcel Information
A parcel is a single unit of taxable property. The name and address of the owner and the property have been deleted, but this is where they would appear. There's a legal description of the property, too. This one is in the University Farm subdivision, phase 1, lot 78.

Valuing the Characteristics of Property
This is the real nitty-gritty of assessment. The assessor has inspected the house (or had it inspected) and recorded its characteristics. The house may have been inspected during the most recent reassessment in 2002-03, or in a previous reassessment. Houses are inspected when they are built, and may be inspected when they are remodeled.

The characteristics are recorded using codes that are not easy to decipher. The staff member in the assessor's office was kind enough to tell the author what each meant, but there apparently no ready handout for the public to help property owners understand these codes.

Each code designates a characteristic of the house, and the corresponding number is the value attached to that characteristic. The sum of the values of the characteristics is the starting point for the assessed value of the house.

Here's how it adds up:

Where do the numbers come from? In Indiana, the values are based on construction costs provided by private firms that measure costs for appraisal purposes. That's because Indiana uses the replacement cost less depreciation method for assessing houses. The value of a house is the sum of the values of its characteristics, based on how much it costs to construct each added characteristic.

In other states, and (perhaps) in Indiana in the future, the sales comparison method will be used. The look of the assessment printout may not change much, but the values will be derived from statistical methods that compare the characteristics of houses to their selling prices. Each number will then represent what each feature adds to the selling price of the house.

Remodeling
The comments section of the assessment record shows that the house was remodeled in 2002-2003. The remodeling, according to the assessor, added $25,000 to the value of the house. That's now reflected in the characteristics valuation--the remodeling was a first story room addition, so it's now part of the $66,500.

The date 3-1-2003 was the first March 1 assessment date after the remodeling was complete, so that's when the assessed value changed. In Tippecanoe, and many other counties, the assessor is tipped off to the remodeling work by a building permit. That's the "BP" number in the comments section.

Adjustments to Replacement Cost
Replacement cost is an estimate of what it would cost to build the house again. But the house isn't new. According to this assessment record, YEAR BUILT was 1985 and the house was remodeled in 2002 (YEAR REMOD). It's EFF YEAR--"effective year"--is sometime in between, here recorded as 1987. Depreciation--the wearing out of property--is calculated based on age, but when a property has been remodeled, age gets a little iffy.

Some houses are built with the best materials and workmanship. Some aren't. The GRADE listed on the assessment record measures the quality of construction. "C" is average. This house is a little better than that, C+1. Some houses are well-maintained. Some aren't. This is measured by COND, condition. This house was judged to be in average condition.

The FACTOR of 105% reflects this C+1 grade and average condition. Because the construction quality is a little bit better than average, the replacement cost will be increased by 5%.

No measurement is recorded next to the term "NEIGH." This used to stand for a neighborhood adjustment, which was an attempt to measure the effect of the surrounding neighborhood on the house's value. It was part of the Indiana assessment process before the switch to market value. This neighborhood adjustment has been replaced by another neighborhood factor (see above on the assessment record, below for text).

Indiana uses "replacement cost less depreciation." The PHYS code measures physical depreciation. For this house, 11% is subtracted for depreciation. The calculation is based on the age of the house. OBSL is another kind of depreciation, known as obsolescence. This doesn't often apply to residential property. But a manufacturing facility may be new and in perfect condition, yet nearly worthless because it has been made obsolete by advances in technology. It can't produce a competitive product. The assessor may subtract a percentage from replacement cost in such cases.

Neighborhood Factor
The biggest change in the assessment process when market value assessment was adopted came in the application of the neighborhood factor. Here's how it's calculated. For this neighborhood (coded "402"), the prices of houses that sold in recent years were compared to their replacement costs less depreciation. The comparison revealed that the houses sold for a little bit more than the assessment process measured--typically, about 6% more.

Perhaps the measurements of depreciation or condition were not quite right. Perhaps construction costs in this neighborhood were a little higher. Perhaps the neighborhood's location, or its school system, or its reputation allowed sellers to get a little more. The reason doesn't matter very much, but since assessed values are supposed to be predictions of selling prices, this adjustment for actual selling prices matters a lot.

Drawing the correct boundary around a neighborhood is very important for calculating the neighborhood characteristic. The assessor must assume that what is true for houses that sold would also be true for houses that did not sell. If the neighborhood boundary is incorrect, and includes houses in a different area that sold for (say) 20% more than replacement cost less depreciation, those houses will be under assessed.

That's it for assessing the house. Here's how it adds up:

Values are rounded to the nearest 100. The house is the only structure on this lot, so the total assessed value of improvements is $140,100.

Value of Land
Land is assessed based on the size of the lot (measured by frontage and depth), and the selling prices of vacant lots in the neighborhood. There are still some vacant lots in this neighborhood, so the assessor has some evidence to use in assessing lot values. Where no vacant lots have sold for a long time, there will be some guesswork involved.

The value of this lot is set at $43,600, rounded to the nearest 100.

Total Value of Land and Improvements
All that's left is to add it up. The land is worth $43,600, the improvements, $140,100. The sum is $183,700, and that's known as the gross assessed value of the house.

Indiana is a market value state. That means that the total assessed value of the parcel is a prediction of its selling price. The homeowner should ask, "would I sell my house for this price?" And, "would anyone buy it for this price?" If the answer to both is "yes," the house is probably assessed accurately. If the answer to either is "no," there may be an error. If the answer is "no" to the second question, the assessment may be too high (no one would buy it for that high price). The homeowner might consider an appeal.

In a sense, all the details about assessment don't matter. All that matters is whether the assessment is a good prediction of selling price. The assessor may use sales comparison, or replacement cost less depreciation, or he or she may read tea leaves. If the assessment is a good prediction of selling price, it's right. If it's not a good prediction of selling price, it's wrong.

Property tax assessment is mass assessment. Statewide, about three million parcels are assessed. All that can be hoped for is rough accuracy. The usual standard is 10%. If the assessed value is within ten percent of the actual selling price, the assessor has done well. For this house, that 10% range is $167,000 to $204,100. The assessed value is 10% more than the lower price and 10% less than the higher price. According to this homeowner, there's hardly any doubt that the selling price would fall in this range. This house is correctly assessed.