You may have to do a problem on the Real Estate License Exam using equalization rates, sometimes called equalization factors, to figure out a county property tax (as opposed to a city, town, or village property tax), so make sure you’re prepared.
In a simple situation, several towns, cities, and villages within one county all levy their own taxes to pay for their own services, but the county also needs to collect taxes from all the residents in the county, and it may use the tax assessments from each town, village, and city.
Equalization factors are needed in situations where county property taxes are being collected from several different towns, cities, and villages (municipalities) that are using different assessment ratios within that county.
For example, House A in Town A has a market value of $200,000 and House B in Town B has a market value of $200,000, but Town A uses a 50 percent assessment ratio, which results in an assessed value of $100,000, and Town B uses an assessment ratio of 40 percent, which results in an assessed value of $80,000.
If you applied the same county tax rate to these two assessed values, House A would pay more county taxes than House B, even though they had the same market value. The equalization rate to the rescue.
The equalization rate is used to eliminate these differences and ensure people are paying their fair share of county taxes regardless of the assessment ratios their local municipalities use. Different counties may handle the math differently, but the easiest way to look at this is that the equalization rate compensates for the individual municipal assessment ratios so that properties in the county are brought back up to full market value.
That value is then used for county tax calculation purposes. You need to note that although equalization rates are commonly used by counties, they can be used by any unit of government that collects taxes from different lower level taxing units, like a regional water authority that taxes counties or municipalities.
To figure out the county taxes on any given piece of property, you take its assessed value and multiply it by a designated equalization rate to come up with its equalized value. Don’t worry — you won’t be asked to calculate an equalization rate on the test.) You then multiply the property’s equalized value and the tax rate, and presto! You have the county taxes due. Here are two handy formulas:
Total assessed valuation (in the municipality) x equalization rate for the county or other taxing unit = equalized value (total assessed valuation for the county or other taxing unit)
Equalized value x tax rate for the county or other taxing unit = taxes due to the county or taxing unit
Here are equalization rates in action. Say that Town A assesses its property at 25 percent of market value, Town B at 50 percent of market value and Town C at 80 percent of market value. When the county applies its tax rate to all properties in the county, properties of the same value pay different taxes, because each house is assessed at a different percentage of market value.
Taxes are calculated against assessed value, not market value. A $100,000 house in each of the three example towns respectively is assessed at $25,000 (Town A), $50,000 (Town B), and $80,000 (Town C). The simplest thing to do is to raise all the properties back up to their full market value and use that to calculate the taxes.
The equalization rate is based on the different assessment ratios in each town, so that taxpayers pay their fair share relative to each other. In the example that follows, all three taxpayers pay the same amount of county taxes, because all three houses have the same market value.
Assessed value x equalization rate = equalized value
$25,000 x 4 = $100,000
$50,000 x 2 = $100,000
$80,000 x 1.25 = $100,000
Notice a few factors here:
Value has been equalized up to 100 percent of market value. It doesn’t have to be 100 percent; it can be equalized to any level of value as long as all the individual assessments are equalized in the same manner.
A different equalization rate is in effect for each property because each municipality assesses properties at a different percentage of market value.
You won’t have to calculate an equalization rate, but you may have to calculate taxes using an equalization rate. Here’s a sample problem. A property is assessed at $40,000. Its equalization rate for county taxes is 1.5. The county tax rate is 10 mills. What are the county taxes on the property?
$40,000 (assessed value) x 1.5 (equalization rate) = $60,000 (equalized value)
10 mills (tax rate) ÷1,000 = $0.01 (tax rate in dollars)
$60,000 (equalized value) x $0.01 (county tax rate) = $600 (county taxes due)
Just in case you get a question that mentions equalization rates and doesn’t specify that it’s for a county or school district, your best bet is to use the sample calculation and use the equalization rate to calculate the taxes due.
