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In: Accounting

As a homeowner in the City of Bloomington you are interested in calculating the Effective Property...

As a homeowner in the City of Bloomington you are interested in calculating the Effective Property Tax Rate you expect to pay on your property. Based on the following information, calculate the ETR of your property for BOTH of the following scenarios. It is fine to work in groups but you must turn in your work and your work only.
Scenario 1)
You know from government legislation that the legal tax rate on your property is 2.4% and the city’s assessed value of your property is $145,000. However, your property is currently on the market for only $60,500 due to a significant downturn in the housing market.
What is your Effective Property Tax Rate?
Scenario 2)
You know from government legislation that the legal tax rate on your property is 2.4% and the city’s assessed value of your property is $145,000. However, your property is currently on the market for $175,000 due to a recent boom in the housing market.
What is your Effective Property Tax Rate?
Analysis:
Compare and analyze the two ETRs. How did the change in market value affect the property ETR? Would you prefer your home to be undervalued or overvalued by government assessors before you pay your property taxes?

Solutions

Expert Solution

We first have to know that the market value of the property don´t interfere directly with the ETR because for its calculation we just use the assessed value and legal tax rate. To get the ETR we must multiply the assessed value by the tax rate.

SCENARIO 1.

Assessed value= 145,000

Tax rate= 2.4%

ETR= 145,000 * 2.4% = 3,480

ETR =3,480/145,000= 0.024 =2.4%

Our ETR is equal to the tax rate.

SCENARIO 2.

Assessed value= 145,000

Tax rate= 2.4%

ETR= 145,000 * 2.4% = 3,480

ETR =3,480/145,000= 0.024 =2.4%

Our ETR is equal to the tax rate.

Analysis.

In both cases the ETR is the same. As we could see the change in the market value didn´t affect the ETR because that value isn´t part of its formula. Anyways on the first scenario i am paying more taxes due to the fact that the property was assessed for a much bigger valued than its market one. On the second one I am paying less taxes than the ones I would in the case the value taken into consideration to calculate the ETR were the market one.

I would prefer to have my home undervalued by government assessors, since it doesn´t interfere with the value it could get in the market. Also if it´s undervalued by them I would pay less taxes

ekkarill92 answered 1 year ago
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