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Realities of Real Estate: Assessments go down; taxes go up

Last week, many of us received new real estate assessments from the Maryland State Department of Assessments and Taxation. Every three years, one third of all property is assessed.

For our home in Annapolis, this was our year. Whenever the new assessments come out, there’s a good deal of confusion about what the numbers mean. And, with the fairly new phenomenon of “declining” assessments, many homeowners are justifiably confused about why their real estate taxes keep going up, even though assessments have gone down.

Consequently, we thought this would be a good time to review how real estate taxes are calculated, how the new assessments will affect your tax bill, as well as what falling assessments might mean for the real estate market in general.

Homeowners pay real estate taxes to the state, county, and in certain municipalities, like Annapolis, to the city. There are two components to how the government figures out what you owe. The first is your assessment, which is what the state has determined is the value of your home.

The state assembles assessments en masse, so the number they come up with isn’t always accurate. As real estate agents, we have often seen the sales price of homes, which is the “true” fair market value, vary substantially from assessed values.

In the recently assessed parts of southern Anne Arundel County and Annapolis, the average assessed value declined by 15 percent. But the numbers can be all over the map. Our own home went down by 7.8 percent; whereas, the assessed value of another Annapolis property we have listed for sale declined by almost 25 percent.

The second element in calculating your taxes is the “tax rate.” There are different tax rates for the state and individual counties or municipalities.

Right now, the Maryland state tax rate is 11.2 cents for every $100 of assessed value. If you live in Anne Arundel County, you add to that 91 cents for the county portion, resulting in a total of $1.022 per $100.

However, if you live in Annapolis, your tax rate is higher. You pay the same 11.2 cents to the state, and your county tax is reduced to 54.3 cents, but you also pay an Annapolis City tax of 56 cents. That brings the tax rate for city residents to $1.215 per $100 of assessed value, 19 percent higher than what’s paid in the county.

The state tax rate of 11.2 cents is unchanged from last year. But, both Anne Arundel County and the City of Annapolis increased their tax rates by 3 cents.

On the surface, one would think that if assessments declined in Annapolis by 15 percent, and the tax rate only went up by 3 cents or 5.7 percent, the result would be lower taxes. Well, that’s not going to happen. The tax bill for Annapolitans is going to go up, and go up rather significantly. The reason is something called the Homestead Tax Credit. Here’s how that works.

Basically, the Homestead Tax Credit limits how much your “assessed value” can increase by in any given year. In Anne Arundel County the limit is 2 percent. For the state and Annapolis, the limit is 10 percent. Because of this, some of the very large assessed value increases of a few years ago are still phasing in, and even though the new assessed value of your home may have gone down, the assessed value used to calculate your taxes is still going up.

This phenomenon is spelled out in the bill passed by the Annapolis City Council to increase the tax rate. In that legislation, it indicates that the total assessed value in the city was projected to increase by 2.9 percent. So, to keep the amount of money flowing into the city coffers unchanged, the “tax rate” would actually need to be reduced from 53 cents to 51.49 cents. Instead, the city increased the tax rate to 56 cents. The result is an additional $2.97 million in real estate taxes that will be paid by the citizens of Annapolis.

In the end, the Homestead Tax Credit essentially creates a lag time with respect to paying taxes on what the state considers to be the full market value of your home. But, when the new assessments come out, and people read the headlines about big assessment reductions, and it leaves many scratching their head when the tax bill continues to go up.

The confusion is further complicated by the fact that some homeowners qualify for the Homestead Tax Credit and some don’t. Plus, the amount of the credit varies across the state, and an individual homeowner can have one Homestead credit for their county/state taxes and a very different credit depending on whether or not they live in certain municipalities.

For example, the assessed value of our home used by the City of Annapolis to calculate real estate taxes is more than twice the amount of what is used by Anne Arundel County. This is because the Homestead Credit for Anne Arundel County is, in effect, 5 times higher that the credit provided by Annapolis City.

Subsequently, if our property were located just outside of Annapolis, our real estate taxes would be 40 percent lower. Part of this is due to higher Annapolis tax rates, but the bulk of it results from the substantial difference in Homestead Tax Credits.

Given the importance of the Homestead Tax Credit, there’s something you should be aware of. Granting the credit used to be automatic. Then a few years ago, the Maryland legislature changed the law, making it necessary for homeowners to make a one-time application for the credit. So, it’s very important that you make this application.

To be eligible for the credit, the house must be your principle residence; investment properties do not qualify. For those who just received their new assessment notice in the mail, an application for the Homestead Tax Credit was included. Otherwise, you can apply online here.

Although declines in property assessments might ultimately help keep a lid on your tax bill, the flip side of the coin is the impact they might have on overall property values. As we said earlier, assessed values can be wildly inaccurate and don’t necessarily reflect current market value.

Nevertheless, in today’s computerized world, home buyers can easily access assessment information, and if the tax value is considerably less than a home’s asking price, buyers will use that as rationale for negotiating a lower sales price. Furthermore, many real estate web sites, like, use assessment information in their mathematical models for estimating property values, which is why those models have an enormous error rate.

It’s important to remember that assessed value is, by far, the crudest method of determining what a house is worth.

When the state came up with its new assessments, there weren’t personal visits made to each home to inspect its condition or look for improvements. Nor was there any analysis of changing market conditions or the unique variables that are critically important to each individual neighborhood.

The state’s work is a broad brush effort that is often somewhat tinged by the knowledge that changes in assessed value will affect tax revenues. Furthermore, assessed values tend to tell us where we’ve been with respect to prices, rather than help us understand where we are, and where we might be going. As agents, we’ll take a look at assessed values, but in deciding what a house is worth, it’s often our least reliable tool.

In sum, tax assessments can have a considerable impact on your pocketbook. They’re used by the government to calculate your taxes, and they’re used by buyers to help figure out the value of your property.

So pay attention to your assessment changes and make sure they’re reasonably in sync with the true market value of your home.

Bob and Donna McWilliams are practicing real estate agents in Maryland with more than 25 years of combined experience. Their email address is

One comment

  1. The assessment can also be based upon inaccurate information. For instance, I once appealed my assessment and learned that the county thought my house had an additional bathroom and other improvements that it did not have. It took an appeal to correct the information and receive a lower assessment.