Estimating New Construction Property Tax in the Memphis, MSA

There is an inexact science involved when it comes to how property taxes get established for new construction properties. To help bring clarity around this issue, we want to provide some context as to how property tax rates are determined in the first place.

Every home in TN and MS has a “tax appraised value,” which is comprised of a “structure value” and “land value.” For an existing home in these states, local tax assessors are required to reassess the total “tax appraised value” every four years (although this can be every six years in some parts of TN).

However, new construction homes don’t have a “structure” value assigned to the property at the time of its completion. In fact, new construction homes don’t typically get a “structure” value until the following January (although the local tax assessor has the authority to reassess the “structure” value as soon as a Certificate of Occupancy is issued). This can benefit a buyer in that they may only pay tax on the “land value” for the remainder of the calendar year in which the home was purchased.

Although there is no clear formula as to how structure values get determined (we have inquired with local tax officials as to how we can bring more predictability to this process, but to no avail), we do have the ability to notice trends in the area. In our experience, the “tax appraised value” is typically 60 to 75 percent of the estimated retail or ‘market’ value that a home would appraise for. Please click on this link for an example of a recently built home located in the Nicole Place subdivision in Horn Lake, Mississippi. In this example of a 1,918 SF home, we estimate the “market value” of this property to be $220,000 based on comps in the area. The tax-appraised value is shown to be $142,248 or about 65 percent of the expected home value.

In Horn Lake the Nicole Place subdivision in particular we most commonly use 65 to 70 percent of the purchase price to estimate the “tax appraised value” for a given property. Once we have the tax appraised value, we plug the tax appraised value into a tax calculator. You can find that using this link. To find the correct tax rate for an investment property, we need to use the “NO Homestead Exemption 15% Assessment.”

Once a property is given a tax-appraised value, the value can be input into a tax calculator for the given area to find the property tax rate. In this particular example, the annual property tax rate for a non-owner occupied property in Horn Lake would be $3,157.47.

When purchasing a home using financing, it can be common for the lender to use the sales price as the “tax appraised value” when making these calculations, resulting in an over-estimated tax rate for the property. This can lead to the bank requiring larger impound payments than what was initially modeled in your Meridian pro forma estimate. If a “tax appraised value” were to come in at the sales price of the home, the homeowner can object with the city and ask for a re-assessment by using comparable properties as the basis/reasoning for a reduced “tax appraised value.” While this possibility has not yet occurred for a Meridian investor, it’s nice to know there are ways to challenge a property tax rate that has been over-assessed.

If you have any additional questions about property taxes, please give Brian Conlon a call at our San Diego office to discuss.

Watch the Replay of our July 2021 Meridian SFR Quarterly Update.

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