An assessment standard answers the question: "If we're going to have a property tax, what should it tax?" The obvious answer is "the value of property," but that poses a problem. What is the value of property? An obvious answer is the price at which the property sold, but this poses another problem. 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. This is in contrast with the income tax and sales tax, where the normal course of business produces payroll records and sales receipts that measure the value to be is taxed.
State and local governments solve the property tax value problem by hiring assessors to measure the value of taxable property. The assessors must be told how to value property. What rules and methods should be used? What is the ultimate goal? The assessment standard is a statement of what the assessor and the assessment rules are aiming to measure.
Indiana's assessment standard is effectively market value. Market value is defined by the International Association of Assessing Officials 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.
Under market value, property assessments are predictions of what a property would bring if it were sold. Market value assessments are based on predicted selling price. 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 l ess 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 farm land, which is the only big part of taxable property that is not assessed using market value. Farm land is assessed based on its "use value," which means that assessments vary only with their productivity in agriculture. The value of the land for residential or business development is not considered, even it it influences the price for which the land could be sold.
The Department of Local Government Finance (DLGF) 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.
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