Property taxes are one of the main components of most monthly mortgage payments and can easily total thousands of dollars per year. As a result, they are an important consideration when looking to buy a home.
Property taxes are a primary source of revenue for county and municipal governments in Tennessee. While most property owners understand that increases in the assessor’s appraised value of their property or the tax rate can increase their property tax, few understand how their annual property tax is calculated.
To determine a property’s tax liability, a property owner must know the assessor’s appraisal value, the assessment rate and the county and the municipality’s tax rates.
The office of the Shelby County Assessor of Property bases the appraisal value on a property’s use, characteristics (location, square footage, quality of construction and amenities), and current market conditions (determined by sales in the immediate area during the past three years). These values are reassessed every four years. The last reappraisal was conducted in 2004.
A property’s classification determines the assessment rate. In Tennessee, residential properties and farmland are assessed at 25% of the appraised value. Commercial and industrial properties are assessed at 40% of the appraised value.
Under state law, counties and municipalities are permitted to establish the tax rate. Tax rates are presented in a dollar rate per $100 of assessed value.
Property located within a municipality is charged both county and municipal property taxes.
Tax rates are applied to the assessed value to determine the property’s tax liability.
In the following example, a home located in Memphis is appraised at $100,000. The homeowner is responsible for Memphis City and Shelby County taxes. Here is the breakdown:
|Home appraised at
Assessed value ÷ 100 = 250
Memphis $3.4332 x 250 (per $100) $858.30
ShelbyCounty $4.04 x 250 (per $100) $1010.00
Combined tax liability $1,868.30
Real estate tax information by county and for the city of Memphis can be found here. Additional information on property taxes in Shelby County, including a property tax calculator, can be found at www.assessor.shelby.tn.us.
For existing homes, property taxes are pro-rated at closing between the buyer and seller based upon the closing date, the dates that property taxes are due in the respective county and municipality and information on tax assessments and rates available at closing.
The property tax liability on new construction is assessed differently. Under Tennessee law, an assessor’s office must appraise property to reflect its condition as of January 1 of each tax year. An assessor’s office must revalue the property when the construction of an improvement, addition or demolition is completed prior to September 1 of any tax year. If the structure is completed before September 1, a prorated assessment is issued. If the structure is not completed before January 1, a partial assessment is issued. In other words, if the improvements (i.e. home) are completed by September 1, taxes will be assessed on the land for that year and be prorated on the improvements from the time they are completed until the end of the calendar year.
Payment of taxes
Buyers should ask if their lender will escrow a portion of their monthly mortgage payment to cover annual property taxes. If so, the lender will pay annual property taxes directly to the municipality and county as they become due. If not, the buyer will be responsible for paying them directly.