Land and Property Tax: A Policy Guide

Valuation Example: Capital Market Value based on the cost approach Taxable value is determined by the capital market value of the property. In this example, capital market value is estimated using the cost approach. The premise of the cost approach is that no buyer would pay more for a property than the cost of buying similar raw land and constructing the improvements. Step 1: Gather construction cost data for buildings and land sales prices for recently sold parcels of land. There are typically three different cost concepts that can be used. Historical cost less depreciation is the cost of the land and buildings when the building was first constructed. From this amount, depreciation is deducted to reflect the aging of the building. Replacement cost calculates the cost of replace the functionality of the building using current construction standards and methods. Reproduction cost calculates the cost of reproducing the building as it is, if it had to be reproduced in the current market. Most commonly historical cost less depreciation or replacement cost is used. Step 2: Collect land area, building area and building attribute data for each land parcel. Step 3: For each property to be valued, estimate the capital market value as the cost of land and buildings. Step 4: Calculate the taxable value from the market value, if the two differ by policy. Step 5: Apply the approved tax rate to the taxable value to obtain the tax due. Example: Analysis of current construction costs and market land values has been completed by the valuation staff. The subject property has a building which is ten years old and an expected total life of 50 years. There are other on-site improvements. Data collected on the subject property when combined with the construction cost information yields the estimates shown in the table. The valuer must judge which is the more reasonable estimate of overall cost. If the replacement cost value is selected, and the tax rate is 1 percent, the tax due will be 495.

52

Historical Cost less Depreciation

Replacement Cost

Cost of Land

10,000

13,500

Cost of building

50,000

35,000

10 years of depreciation

(10,000)

(7,000)

Other improvements

15,000

10,000

Less depreciation

(5,000)

(2,000)

Total

60,000

49,500

# Land and Property Tax

In the Guide, you will find answers to questions such as why land and property taxes are often an important source of local revenue, what th...

# Land and Property Tax

In the Guide, you will find answers to questions such as why land and property taxes are often an important source of local revenue, what th...