Property taxes are based on the assessed property value and tax rate or levy. Each year Dallas, Tarrant, Denton and Collin County have hundreds of thousands of properties to value for annual property tax assessment. The Appraisal District utilizes a mass appraisal system to estimate the value of your home.
The value assigned to your home on your Notice of Appraised Value each year is an estimate based on the formulas within the mass appraisal system. It is not an individual appraisal of your home. While all counties utilize slightly different terminology in developing their mass appraisal system, they are all based on the same principles. We’ll explain these methods of appraisal in detail to help you understand your property tax bill.
Methods to Assess Property Value
There are three methods an appraisal district can utilize when valuing properties on a mass appraisal system: the income approach, sales approach, and modified cost approach.
The income approach is mainly used for commercial properties and is calculated using the income a property generates to estimate the value. The appraisal district does not normally have the actual income for a segment of properties prior to estimating the values for any given year, so the approach used in the mass appraisal system is based on a pro-forma income model using market driven rental rates and expenses.
Another method for valuation is the sales approach. This approach is most commonly used in condominium and townhome complexes where the differences in construction style and quality are minimal and a more basic price per foot of sales can be applied to multiple units.
Modified Cost Approach
The third approach is a modified cost approach. This approach is most commonly used on single family residential properties. Following is a breakdown of how the modified cost approach is utilized.
- For any mass appraisal system to work efficiently on a modified cost approach to value, properties are split into groups using geographic location, building material, and quality of construction.
- Once split into groups, the appraisal district will assign specific characteristics to the home that will affect the mass appraisal formula in different ways.
- The costs are then multiplied by a factor for the homes in the same group that is derived from sales of homes in the area.
- Finally, the home is depreciated from the calculated cost number based on its age and overall condition.
This is considered a modified cost approach because the appraisal district is using market sales data to derive the multiplier applied to the raw cost figures.
More detailed information regarding the modified cost approach is below.
How Properties are Assessed with the Modified Cost Approach
The appraisal district will first split properties up by geographical area and assign each area a neighborhood code. Most neighborhoods have fairly easily defined boundaries and can be identified by the subdivision the home sits in.
The next grouping will be based on building material and construction quality. The appraisal district will assign each home to a particular “class” in their mass appraisal system.
The classification systems used by the different appraisal districts can be very different from one county to the next. For example, a custom built, brick veneer house could be classified very differently in different counties:
- Dallas County could classify the house as a Class 24
- Collin County could label the same house RV22
- Denton County could then put a similar house in their system as a 10D
- A similar Tarrant County house could be classed as “Excellent”
The key point in classifying homes in these systems is understanding what the different classes are describing for that county in particular.
Account for Unique Characteristics
Once the homes are assigned to their neighborhood code and class, the appraisal district will then apply variables in the formulas to account for different characteristics. This step is the way a mass appraisal system can fine tune the formula to make adjustments for differences between the houses in the same neighborhood and class. Examples of differences include:
- A slate roof would be a positive deviation in the formula when compared to a composition shingle roof, for example.
- Likewise, a 3 car garage will be calculated in the formula higher than a 2 car garage.
Values are also assigned at this point to any additional improvements that are not part of the main area of the house (pools, guest houses, barns, etc.) and added to the overall value.
Multiply Costs By a Factor for Homes in the Same Group
It would be nearly impossible to set up individual cost tables for each class and neighborhood in a mass appraisal system, so the next step in the process is applying one set of cost tables for all homes in the county within the same classification rating.
Once the base prices are set up using these cost tables, the Appraisal District will then look at the market sales for each individual neighborhood and derive a neighborhood multiplier for that particular neighborhood code.
This neighborhood multiplier is one of the most important parts of the mass appraisal system. This figure is how values are moved on neighborhoods as a whole from year to year.
Apply Depreciation Based on Property Age and Condition
Finally, the formula will then apply depreciation to the house based on the age and condition of the property. Like the classification system, depreciation schedules can vary significantly from county to county. Any abnormal deficiencies or excessive wear and tear on a particular home can be used to allow for more depreciation calculated in the formula than what would be considered normal.
Once the depreciation is applied to the formula, this generates the final estimated “improvement value” of the property. The land value is added to the improvement value, and this is what ends up on your Notice of Appraised Value.
Should You Appeal Your Property Tax Assessment?
Texas property taxes are determined at the county level. Your property tax bill is calculated using the assessed value of your home and the tax rate in your county.
While you cannot appeal the tax rate, you can appeal your assessed value. Property owners will receive their notice of appraised value annually in the spring. If you believe your property value is too high, you may be able to dispute the appraised value and lower your property taxes.
Understanding appraisal methods and how property taxes are calculated can be key in winning your appeal. You can choose to appeal your assessment on your own, or you can hire a property tax reduction firm.
At NTPTS, our consultants have extensive experience with property tax appeals. With knowledge of the Dallas-Fort Worth real estate market and appraisal methods, our clients receive the best representation. If you are a homeowner in Dallas, Tarrant, Denton, and Collin County, contact us for more information.