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How to Calculate Tax Rates for the Real Estate License Exam

Although calculating tax rates is not something you specifically need to know how to do for the Real Estate License Exam, it is something you need to understand in general to answer non-math questions about the process. Knowing how to calculate taxes isn’t a bad thing to know, because you probably pay property taxes and may want to know how these guys at city hall come up with their numbers.

Tax rates in a municipality are based on a calculation involving the budget needs of the community and the total assessed valuation of the community. The municipality must first arrive at a dollar amount for its annual budget, and after that figure is adopted, the municipality looks at its tax base, which is the total assessed valuation of taxable property within the community.

So how do you figure out a basic tax rate? Easy! Just remember this formula:

Municipality budget ÷total assessed valuation = tax rate

For example, say a city has adopted a budget of $2.5 million. Its total tax base is $50.0 million. You divide the budget number by the total assessed value to come up with the tax rate. In this case

$2,500,000 ÷$50,000,000 = $0.05

This formula translates the fact that the municipality must collect five cents for every dollar of its total assessed value. However, tax rates never are expressed in cents.

Throughout the United States tax rates are reported in one of three different ways that vary by state and by municipality within the state. Using the basic tax rate that calculated above, $0.05 of tax for every $1 of assessed valuation as an example, the three ways are

  • Mills of tax per one dollar of assessed value — 50 mills/$1.

    One mill is one one-tenth of one penny, so 50 mills is $.050, which you get by dividing the number of mills, usually referred to as the mill rate or millage, by 1,000.

  • Dollars of tax per hundred dollars of assessed value — $5/$100.

  • Dollars of tax per thousand dollars of assessed value — $50/$1,000.

Each of these calculations is a different way of expressing the original calculation of $.05/$1.00.

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