Definition
Assessed Value refers to the value of a property as determined by a public tax assessor for the purpose of taxation. Market Value, on the other hand, refers to the amount a buyer is willing to pay for the property in a competitive, open market. Essentially, the assessed value usually serves as a base for property tax calculations, while the market value reflects the prevailing real estate market conditions.
Key Takeaways
- Assessed Value and Market Value are both valuation methods used in real estate, but they serve different purposes. Assessed Value is primarily used for taxation purposes while Market Value is what a buyer is willing to pay on the open market.
- The Assessed Value is usually determined by a public tax assessor and is used to calculate property taxes. The Market Value, on the other hand, is typically determined by real estate appraisers and changes over time based on factors like property condition, location, and real estate market trends.
- There can be a significant difference between these two values. A property’s Assessed Value may be lower than its Market Value because tax assessors are often working with outdated and infrequent assessments. Meanwhile, the Market Value tends to be more dynamic and accurate as it reflects the current housing market.
Importance
Understanding the difference between assessed value and market value is important in finance particularly in real estate transactions and property taxes.
The assessed value, determined by the local government, is used to calculate property taxes and may not reflect the current market conditions or the actual price a buyer is willing to pay.
On the other hand, the market value is the estimated amount a property would sell in the current market, based on factors like location, condition, and recent sales of similar properties.
Property owners and buyers use this knowledge to negotiate fair prices, contest assessed values, and predict future property taxes.
Thus, the comparison between assessed value vs market value is critical in both personal and commercial real estate transactions.
Explanation
The main purpose of the term Assessed Value in finance is for property tax purposes. Local governments determine an assessed value for a real estate property, which becomes the basis for the amount of property tax that the owner is required to pay. Assessed value is not necessarily equivalent to the actual price that might be paid for a piece of property, but instead represents a standardized estimation of its value.
Comparing assessed values can help property owners understand whether their tax bills are equitable and reasonable. On the other hand, Market Value is an estimation of the actual price at which a property would sell in a competitive market based on its individual features and the surrounding area. This is the price a buyer is willing to pay, not the price a seller asks for.
Market value can fluctuate based on supply and demand trends in the real estate market. This value is important for homeowners and potential buyers, as it provides a baseline for comparing the prices of different properties and negotiating the selling price. Therefore, while the Assessed Value is important for tax purposes, the Market Value can greatly affect buying and selling decisions in the real estate market.
Examples of Assessed Value vs Market Value
Example 1: Home PurchaseIf you’re planning to buy a home listed at $300,000, this is the market value – what sellers think their property is worth in the current market. But when the local government assesses the same property for tax purposes, they might value it at $250,000, which is the assessed value. Your property taxes are based on this amount, not on the selling price or the market value.Example 2: Car OwnershipWhen you want to buy a used car that is for sale for $15,000, that is the market value of the car. However, when you register the car and pay taxes on it, the Department of Motor Vehicles will calculate taxes based on their assessed value of the car, which may be lower.Example 3: Commercial PropertyA commercial property may have a market value of $2 million if it was to be sold today, based on comparison with similar properties and the potential income it could generate. However, the local government might use a different formula based on factors such as size, location, and use of the property, leading to an assessed value of $
5 million.In all three examples, the market value represents how much you can expect to pay or get paid if you’re buying or selling the item today. The assessed value, on the other hand, is primarily used for taxation and is typically decided by a government agency. This value is usually (but not always) lower than the market value.
FAQ: Assessed Value vs Market Value
1. What is ‘Assessed Value’?
The assessed value is a value placed on a property for the purpose of taxation. This value is determined by the municipal or county government, often through a property assessment.
2. What is ‘Market Value’?
Market value, also known as fair market value, is the estimated price that a property would sell for on the date of valuation. Market value is often used when planning to sell a property or for financing purposes.
3. How are ‘Assessed Value’ and ‘Market Value’ determined?
The assessed value is generally determined by the local government’s tax appraiser who assesses local property at regular intervals. Market value is effectively determined by the real estate market. It’s based on what buyers are willing to pay for properties.
4. Why are ‘Assessed Value’ and ‘Market Value’ different?
The assessed value is used for tax purposes and is often a percentage of the market value. The market value on the other hand, is more dynamic and reflects the current state of the real estate market, considering recent sales and listings.
5. Is it better to have a higher ‘Assessed Value’ or ‘Market Value’?
Generally, you would want a lower assessed value to pay less in property taxes, and a higher market value if you are planning to sell your property. However, too high of a market value could also mean higher property taxes.
Related Entrepreneurship Terms
- Property Tax Assessment
- Real Estate Appraisal
- Home Equity
- Mortgage Lending
- Property Depreciation
Sources for More Information
- Investopedia: A comprehensive website that provides a wealth of information on finance related terms and subjects, including Assessed Value vs Market Value.
- Realtor.com: This site offers advice, tools and real estate market data, which can be helpful when studying the comparison between Assessed Value vs Market Value.
- Zillow.com: A leading real estate and rental marketplace that offers knowledge about the difference between Assessed Value and Market Value.
- Forbes: This source provides wide-ranging coverage from personal finance to real estate investing, including topics like Assessed Value and Market Value.
