Valuation
|
by
Anders Müller
_________________________________________________________
This article is on the World Bank web site
about Tax Policy & Administration. The URL is:
The article was completed in January 2001.
A few references have been added in February 2002.
Valuation of Land and
Buildings for the Recurrent Property Tax and for other Taxes
Most countries have an annual property tax
and in most cases the tax base is the market value of land and buildings. This
means that the government has to estimate the market value of all taxable
properties and, for the tax to be fair, it is important that a revaluation take
place at regular intervals – for example every four or five year. This
valuation function for the recurrent property tax is the main topic of this
section.
Table 1. Taxes Related to Immovable
Property.
Base of tax
|
Recurrent (annual)
|
Non-recurrent (at transfer)
|
Land and buildings
|
Property
tax, land tax, rates
|
Transfer
tax or stamp duty
|
All assets
|
Net
wealth tax
|
Inheritance
and gift tax
|
A few countries have a net wealth tax based
on the value of all assets. For immovable property it is common practice to use
the same values for the net wealth tax as are used for the recurrent property
tax.
Some taxes related to immovable property
are only paid when the property is transferred and this is the case for transfer
tax or stamp duty and for inheritance and gift tax. The base for these taxes is
the actual selling price for transfer tax and usually the taxpayer’s estimate
of the market value for inheritance and gift tax. There needs to be provision
in the law for the tax administration to be able to examine these values and
possibly overrule them if they are not a true estimate of market value.
If the estimated market values for the
recurrent property tax are accepted as being reasonably accurate, then these
values can also be used for the purposes of transfer tax and inheritance and
gift tax. This is, for example, the case in Denmark where the assessed value
for the property tax is the minimum base for the transfer tax. For inheritance
and gift tax in Denmark the tax administration will usually accept estimates of
the value made by the taxpayer if that estimate is within plus or minus 15
percent of the assessed property tax value.
If market values of properties are not
assessed for recurrent property tax, or if those values differ greatly from the
true market values, then the tax administration will need to use other methods
for examining and, if necessary, overruling recorded sales prices and value
estimates made by the taxpayer. The methods that have to be used will be the
same as those for the valuation for recurrent property tax (see the rest of
this section), but the volume of properties which will need examination and
valuation is much smaller than for the property tax. Use of independent private
experts to produce unbiased value estimates for inheritance and gift tax is
also a possible course of action.
1. Different Types of Recurrent Property Taxes
There are many different types of property
taxes. Some of them require that the properties are valued and other types do
not require this. Table 2 gives an overview of some different types of basis
and coverage.
In the industrialised countries and in the
developing countries property taxes are usually based on the market value of
the property. In the transition countries property taxes are often area based.
For an area-based property tax, no value estimate is made of the property, but
the tax is based on a certain sum of money per square meter the amount varying
for different types and sizes of land and buildings. An area-based property tax
also exists in Israel and the traditional land revenue on the Indian
Subcontinent, which still exist in Nepal, is another example of an area based
property tax.
Table 2. Basis and Coverage of Recurrent
property Taxes. Examples of different Types.
Basis of the tax
|
Coverage
|
||||
|
Property
|
Land
|
|||
Market value
|
Capital value
|
USA
UK (domestic) Netherlands Denmark Indonesia Chile |
Denmark
Australia Estonia Belize |
||
Annual value
|
UK
(commercial)
India |
|
|||
Other value concept
|
Book value
|
Russia
|
|
||
Acquisition value
|
California
|
|
|||
Area based
|
Israel
Poland Czech Republic |
Nepal
|
|||
In some countries the property tax is value
based, but not based on current market values. In Russia and several other CIS
countries there is a property tax on business enterprises based on the book
value of the buildings, machinery and inventory of the businesses. In
California the property tax is based on the purchase price of the property and
no assessment function is carried out.
There are also differences between the
various property taxes which are based on market values. The most common
situation is that the property tax is based on the capital value of the land
and the buildings – which is what the property could be sold for on the open
market. But in the traditional British system, still in use in many former
British colonies, the tax base is the rental value or the annual value of the
property – which is what the annual rent for the property would be on the open
market. In addition there are some countries that operate land taxes based on
the market value of the land alone.
2. Valuation Issues in Different Types of Countries
As shown in table 3 there are big
differences between different types of countries concerning what the problems
and issues are in relation to valuation.
In many developing countries there are
considerable problems in relation to the valuations for property tax. There are
many different types of problems which result in reduced revenue and in an
unfair distribution of the tax burden. Taxpayers are sometimes able to
influence the assessment process, false rent receipts are presented, the
valuation procedures lack transparency, the basic data are insufficient, and
the administrative capacity and staff qualifications are insufficient.
Table 3. Issues Regarding Collection and
Valuation.
|
Collection
|
Valuation
|
Industrialised countries
|
No problems.
|
Only small problems:
|
Transition countries
|
Relatively small problems.
|
Major challenges in the coming years:
|
Developing countries
|
Often big problems.
|
Often big problems:
|
However, it is important to bear in mind
that in many developing countries the problems with the collection of property
tax are more serious than the problems with valuation. Enforcement steps are
not taken and as a consequence many taxpayers choose not to pay. Because of
this the revenue is reduced and the tax is perceived as unfair. It is,
therefore, imperative that collection is improved before, or at the same time,
as valuation is improved. (See Müller, 2000)
In transition countries the main challenge
is to replace both the area based property taxes, and any property taxes based
on the book value, with new property taxes which are based on the market values
of the properties. In 1993 Estonia introduced a land tax based on the market
value of land is using a simplified valuation system. Latvia is in the process
of introducing a new property tax based on the market value of land and
buildings and also using a simplified valuation system. Slovenia is introducing
a market value based property tax supported by the World Bank. Poland and the
Czech Republic are preparing to introduce market value based property taxes,
but no political decisions have been taken yet. In Russia a US-supported
project has carried out pilot projects in two cities where market values have
been estimated for the properties to be used as a basis for a new uniform
property tax.
3. Basic Approaches to Valuation
The process of producing market values of
properties to be used for a property tax is basically the same process as that
which is used for the appraisal of individual properties for many purposes
including investment and mortgage purposes. In the case of valuations for
property tax, because a very large number of properties need to be valued at
the same time, mass appraisal methods have to be used. This has to be done
because the costs of valuation per property need to be much smaller than what is
acceptable for the individual valuations in the private sector.
In both individual valuation and in mass
valuation there are three accepted approaches to valuation. The preferred
approach is the comparable sales approach since the only direct evidence of the
market value is the sales prices. If the sales approach cannot be used because
of a lack of information about sales prices, then what is known as the income
approach is used. This method comprises taking either the actual, or the
estimated, income derived from the property, usually in the form of rent and
applying a capitalisation factor to this income to arrive at a capital value
The capitalisation factor is derived from examining rented properties which
have been sold and making an analysis of the sales prices realised compared
with the rents received. As a last resort where neither of the above two
methods are suitable, the cost approach can be used whereby the value of the
property is derived from the estimated cost of building the property or a modern
equivalent. For the cost approach the construction costs are obtained from
other known building costs, from cost statistics or from experts in the
estimation of building costs.
Table 4. The Three Approaches to Valuation.
Comparable sales approach
|
|
Income approach
|
The rent income and an estimated
capitalisation factor are used.
|
Cost approach
|
Cost of construction minus depreciation
plus the value of land is used.
|
4. The Mass Valuation Process
In order to value and tax properties it is
necessary to compile a description of all the properties that are the subject
of the tax. This data base is often called the fiscal cadastre or the tax list
and large scale maps can be helpful in ensuring that all properties are
included in the data base, but even without maps it is possible to compile a
complete tax list; this is easier to achieve in urban areas than in rural ones.
The identification of the taxpayers is not needed for the valuation process,
but is crucial for the collection of the property tax.
The gathering of market information on
sales and lettings is a very important part of the valuation process. This
should take place on a regular basis and it necessary for the process to start
many years before any system for estimating market values is introduced. It is
common practice to obtain the registered sales prices from the Land Registry or
other similar body but in many countries, the registered sales prices are not
the correct ones because the sales prices are underreported by the taxpayers in
order to reduce the stamp duty paid, or for other reasons. In such cases
consideration should be given to supplementing this market information with
information from valuation experts, real estate agents etc.
Table 5. The Valuation Process.
Basic description of properties
(fiscal cadastre)
|
Identification (plot number)
|
Location
|
|
Land description (area, permitted use)
|
|
Building description (area, age,
materials, quality)
|
|
Taxpayer (not essential)
|
|
Gather market information
|
Sales prices
|
Rent information
|
|
(Construction costs)
|
|
Valuation
|
Market analysis
|
Valuation modelling
|
|
Calculation of property values
|
|
Valuation review
|
|
Taxpayer relations
|
Valuation notice sent to taxpayer
|
Appeals
|
Rents are another important indication
about the market values and information about rents are usually also gathered
as part of the valuation process. The rental information is normally gathered
by sending a return form to owners and tenants, asking them to submit the
specified information to the valuation authority. Rental information is
especially important if the property tax is based on rental values, but the
analysis of rental information is also an important part of estimating the
capital values for properties, particularly in the case of commercial and
industrial properties where there is usually far more rental evidence than
sales evidence.
The market analysis attempts to determine
how location, land area, size and quality of the building, and other factors
influence the sales prices. Different prices per square meter of land and
buildings are used, depending on the quality and location of the property to be
valued. Plotting sales prices per square meter on maps can be very useful in
determining the influence of location on value.
The valuation models are the result of the
market analysis. They can be mathematical models or they can be tables of
values per square meter for different types of land and buildings.
When the valuation models have been
established the taxable value of each property can be calculated. The valuer
then needs to review the calculated taxable values to assess whether or not
they represent reasonable estimates of the market values. This process is
especially important for unusual properties, such as very large properties or
properties with an unusual location or use.
5. Computerisation of the Valuation Process
The first phase of a computerisation
project will usually include the computerisation of the basic description of
properties, the calculation of property values, and the printing of the
valuation notices and the tax bills. The next phase could be to enter the sales
prices in a computerised database. When these phases have been completed it
will be possible to combine the two processes and computerise the market
analysis and valuation modelling. It is common practice to use multiple
regression analysis in order to produce valuation models, but other methods
(such as "feed back") can also be used.
Computerisation of valuation can, and
usually does, reduce the costs of valuation to a considerable degree.
Computerisation can also be used to make the valuation process more transparent
and less subject to undue influence from the taxpayers.
6. Valuation Frequency
When the property tax is based on the
market value of the properties it is important that revaluations of all
properties are carried out at regular intervals. There are two kinds of
problems that can arise if the interval between revaluations is too great. One
problem is that property tax revenue is eroded because the taxable property
values do not increase with inflation, other property market changes and the
resultant increases in property values. This can be partly solved by increasing
the tax rates or by indexing the taxable property values according to inflation
or according to estimates of increases in property values. The other problem is
that the tax becomes unfair because the market value of some properties has
increased much more than the value of other properties and the relativities
have therefore changed, but the owners are still paying taxes based on the old
values.
It is usual for the valuation frequency to
be specified in the laws that govern property tax or valuation. It is common to
have four or five years between revaluations, but in countries where the
valuation process has been computerised, it has been possible to have more
frequent revaluations. Some parts of the US now have revaluation every year or
every second year and in Denmark there has been, since 1982, indexation of the
values in years between revaluations and, from 1998, a full revaluation every
year.
Some European countries have not had
frequent revaluations. In Germany, the last revaluation took place in 1964 and
recently the federal court has ruled that these values cannot any longer be
used for the net wealth tax. In 1990 the United Kingdom replaced the domestic
property tax with the infamous poll tax, and one of the main reasons was that
the last revaluation prior to this had taken place in 1973. The government was
not prepared to face the electoral unpopularity that would have resulted from a
revaluation that reflected the enormous changes in the relativities of values
that had occurred over the previous seventeen years, and the resultant changes
in the relative tax burdens. The subsequent unpopularity of the poll tax forced
the government to replace it with a new domestic property tax based on a
simplified valuation system using value bands and with no provision for future
revaluations. In France the last revaluation was in 1970, but annual indexation
has been introduced in the eighties.
7. Valuation Principles
When the tax base is the market value of
the property it is essential to define very carefully how that value should be
estimated. It is common practice that the value is the price that would be
agreed between a willing and well-informed buyer and seller for the property at
the time of valuation. A specified valuation date (for example January 1 of the
year of revaluation) is essential so that market evidence from around that time
can be used for the valuation, and so that the condition of the property at
that time is reflected in the value which is produced for the property.
In some countries the value, assuming the
highest and best use to which the property could be put is adopted for property
tax valuations. In other countries, the value is restricted to that for the
existing use to which the property is put. Public regulations are usually taken
into consideration while private regulations (such as special covenants, actual
rental contracts or mortgages) are disregarded. The valuation should include
the land and the buildings, but usually machinery, loose equipment etc are
excluded. There are often special laws and regulations regarding the treatment
of plant and machinery in industrial properties
8. Appeals
It is normal practice for the taxpayer to
be able to appeal against the result of the valuation if he thinks that the
result does not correspond with the true market value of the property. There
should be a deadline for the filing of the appeal, and it is usual to have a
rule that the taxpayer must give the reasons why he disagrees. In some
countries a small fee has to be paid to make an appeal – the fee plus interest
being returned if the taxpayer wins the appeal. It is important that the taxes
due have to be paid even if the value is appealed, because if not many
taxpayers may appeal simply to postpone the payment of the tax.
9. Responsibility for Valuation
In the US the local government or the
county is responsible for valuation. In Europe it is usually the central
government that carries out the valuation even though the property tax is a
local tax collected by the local government. This is the case in the UK,
Germany, France and Denmark. In the Netherlands the municipality does the
valuation. See a description of the situation in Denmark in "Administration of local taxes" under "Tax Structure and Administration".
(links are on the web site)
In some countries, valuers dealing with
property tax are fully qualified valuers where property valuation has been the
main component of their further education and many valuers are employed for the
valuation functions. In other countries the staff working with valuation have
no special training or they have gone through short courses etc. Where the
local government is responsible for valuation, specialist private companies are
often hired to carry out the revaluation for the smaller municipalities or
counties.
Key
Readings:
- Inventory Valuation
- Taxation of Land and Property
- Property Tax in Anglophone Africa. A practical Manual
Links are on the web site.
"Taxation of Land and Property"
is a chapter written by Zuhtu Yucelik and Janet Stotsky in Tax Policy Handbook,
edited by Parthasarathi Shome, pg. 185-188, International Monetary Fund,
Washington DC, 1995
"Property Tax in Anglophone
Africa" by Simon H. Keith is in Washington DC, The World Bank Technical
paper No. 209, pages 1-16, 1997.
Further
References:
- Bahl, Roy W, and Linn, Johannes F (1992). Urban Public Finance in Developing Countries. A World Bank Book. Oxford University Press. Oxford, UK.
- Bahl, Roy W (1998). Land Taxes versus Property Taxes in Developing and Transition Countries. In Netzer, Dick (ed.) (1998). Land Value Taxation. Can It and Will It Work Today? Lincoln Institute of Land Policy. Cambridge, Massachusetts, USA.
- Dillinger, William (1991). Urban Property Tax Reform. Guidelines and Recommendations. World Bank - Urban Management and Municipal Finance. Washington D.C., USA.
- Eckert, J.K.(ed.) (1990). Property Appraisal and Assessment Administration. The International Association of Assessing Officers, Chicago. USA.
(Very comprehensive textbook written for valuation staff in USA
and Canada. Includes computer assisted valuation.)
- Gloudemans (1999). Mass Appraisal of Real Property. The International Association of Assessing Officers. Chicago, USA.
(The newest textbook about mass valuation and computer
assisted valuation. Written for valuation staff in USA and
Canada)
- McCluskey, William (ed.) (1991). Comparative Property Tax Systems. Avebury. Aldershot, UK.
(Country chapters about Australia, Zimbabwe, Malaysia, New
Zealand, Nigeria, Ireland, Philippines, Netherlands, England,
Portugal, Singapore, Northern Ireland, Jersey and the Isle of
Man)
- McCluskey, William (ed.) (1999). Property Tax: An International Comparative Review. Ashgate. Aldershot, UK.
(Country chapters about Singapore, Hong Kong, Malaysia,
Ireland, Pakistan, Thailand, Cyprus, Botswana, Zimbabwe,
Netherlands, Philippines, Brazil, New Zealand, Australia, South
Africa, Kenya, Estonia, Jamaica, Poland, Hungary and Czech
Republic)
- Müller, Anders (1995). Agricultural Land Tax and the Transition to a Market Economy.
In Wunderlich, Gene (ed.). Agricultural
Landownership in
Transitional Economies. University Press of America, Lanham,
Maryland, USA.
- Müller, Anders (1998). An International Perspective on Land Taxation. In Journal of Property Tax Assessment & Administration, Vol 3 1997/98. Ulster, UK.
- Müller, Anders (2000). Adressing Non-payment: Enforcement Issues in Tax Administration in Developing Countries. Paper for the conference "Africa Property Tax Renaissance" in Cape Town, South Africa in June 2000. Conference organised by IPTI (proceedings available at www.ipti.org).
- OECD (1983). Taxes on Immovable Property. Paris, France.
(Country chapters on Australia, Denmark, France, Germany,
Ireland, Japan, Netherlands, New Zealand, Portugal, Spain,
Sweden, Switzerland, Turkey, UK and USA)
- Paugam, A. (1999). Reform Toward an Ad Valorem Property Tax: Fiscal and Non-Fiscal Benefits in Transition Economies. World Bank Report, Washington D.C., USA.
- World Bank (1996?). Property Tax in Eastern and Southern Africa: Challenges and Lessons Learned. Working Paper 2. Municipal Development Programme. World Bank. Washington D.C., USA.
(Conference papers about Ghana, Kenya, Malawi, Namibia,
Tanzania, Uganda, Zambia and Zimbabwe)
- Youngman, Joan M, and Malme, Jane H (1994). An International Survey of Taxes on Land and Buildings. Lincoln Institute of Land Policy and OECD. Kluwer. Deventer, The Netherlands.
(Country
chapters about Australia, Canada, Chile, Denmark,
France,
Indonesia, Israel, Japan, Netherlands, South Korea,
Sweden,
Switzerland, UK and USA)
New
references:
·
Malme,
Jane and Youngman, Joan (ed.). The Development of Property Taxation on
Economics in Transition – Case Studies from Central and Eastern Europe. World
Bank. October 2001.
(Country chapters about Poland, Estonia, Czech
Republic,
Slovakia, Russia and Armenia)
·
Brown,
Peter and Hepworth, Moria (2001). A Study of European Land Tax Systems.
Institute of Revenues, Rating and Valuation. London, UK.
Contact information:
Office: Anders Müller, Central Customs and
Tax Administration, Ostbanegade 123, 2100 Copenhagen O, Denmark. (45) 35 29 27
06
Home: Anders Müller, Vodroffs Tvaergade 5A,
1909 Frederiksberg C, Denmark. (45) 33 31 45 57, taxinn@wanadoo.dk
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