Tax Assessments Based on Value in Use, or Value in Exchange

Know Your Jurisdiction

By David Chitlik Vice President - Hospitality Tax, Altus Group | February 12, 2017

Regardless of property type, tax assessment valuation would appear simple enough. A generally accepted definition of market value is:

"The probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress".

This definition comes from the Appraisal Institute and it closely matches the definition provided by the International Association of Assessing Officers. Buyer and seller arrive at a price based on their own determinations of the highest and best use of the property. Most assessors in the US will include the recent sales data that has occurred in their jurisdiction with other market indicators and trends to arrive at the assessments for the taxable properties in their jurisdiction.

This process is called "value-in-exchange." Approximately 90 percent of residential and commercial real estate tax valuations are determined in this manner. Additionally, as noted above, assessors must consider what the highest and best use is for the subject property, regardless of what the buyer may have in mind. A basic definition for highest and best use, again from the Appraisal Institute:

The reasonably probable use that produces the most benefits and highest land value at any given time.

While most tax assessments are based on that analysis, as well as the value-in-exchange concept, what if the law requires the assessor to overlook the highest and best use determination? How then does the assessor evaluate the market value of the property? In a few jurisdictions, most assessments are based on the existing use regardless of the possibility of higher value alternatives.

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