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How does the city calculate property tax bills?

How does the city calculate property tax bills? Yesterday, the city’s Department of Finance made its annual announcement of assessed property values for all taxable real estate in New York City. These property taxes are a critical source of revenue. But the process is admittedly “complex,” said Finance Commissioner David M. Frankel. So much so, that even…

How does the city calculate property tax bills?

Yesterday, the city’s Department of Finance made its annual announcement of assessed property values for all taxable real estate in New York City. These property taxes are a critical source of revenue. But the process is admittedly “complex,” said Finance Commissioner David M. Frankel. So much so, that even the city’s mathematical modelers tasked with calculating the formula were stymied, delaying the release of this year’s numbers.

Today’s question: How exactly does the city calculate property tax bills?

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What we found:

The complex process of figuring out property taxes boils down to two numbers: the assessed value of your property and the tax rate. Multiply these two, and the result is the tax assessment. But nothing in New York is ever that simple. 

First the easy part: The Department of Finance comes up with the assessed value by first estimating the market value of a property. This can be done through a look at sales of similar properties, the income-producing potential of commercial real estate or the cost of an actual property for new construction and renovations. Finance then calculates the assessed value by multiplying the market value for one-, two- and three-family homes by 6 percent and the market values of all other real estate by 45 percent. State law limits how much the assessed value can increase each year, so the department takes that into account before coming up with the final number.

But the big twist comes when the Mayor and the City Council determine the tax rates later in the year. Under a 1981 state law, each type of property in the city – commercial buildings, apartment buildings, and smaller homes – must contribute a never-changing share of the total amount of property tax collected. Each therefore must be taxed at a different rate. (A 2006 report from the city’s Independent Budget Office describes this odd “class share” system in detail.) Once the assessed values are set and the mayor and city council decide on how much they want to collect in taxes in total, they must spread the pain across each type of real estate according to the math ordered by the state law. “If you know the assessment and the levy, it’s division to get the tax rate,” explained George Sweeting, the IBO’s Deputy Director. “The sharing divides out the levy burden.”

In the last five years, the tax rate for Class 1 properties – small residential homes – has increased to 18.02 while the tax rate for Class 4 properties – mostly commercial real estate – has remained at about 10 percent. That looks unfair at first glance, but Sweeting says those numbers are deceiving. Overall, commercial properties pay more in property taxes. The IBO’s report found commercial properties represented 16 percent of the market value and generated 43 percent of taxes in the city. Residential homes constituted 41 percent of the market value and brought in just 14 percent of taxes.