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Methods of Valuing Land for Real Property Taxation

An Examination of Practices in States that Require Separate Valuation Of Land and Improvements

Michael E. Bell and John H. Bowman

March 2006, English

In the United States, the same property tax rate applies to land and buildings, except in some Pennsylvania municipalities. Nonetheless, 29 states require separate values for land and buildings. Interest in taxing land more heavily than buildings recently has arisen in some states besides Pennsylvania. Where separate land and building values exist, implementing such a two-tier tax appears simple, but how accurate are the separate land and building values, if they do not affect tax liability? This paper begins to address this question through case studies of land valuation in selected localities in four states requiring separate land and building values. With ample sales of vacant land, the land component of improved parcels is estimated from these sales. Where sales of vacant land are few, each study area generally relies primarily on one of three approaches to derive land values for improved properties: abstraction, which calculates residual land value by subtracting depreciated replacement cost of improvements from total parcel value; allocation, which assigns a “typical” percentage of total parcel value to land; and contribution to value, which uses regression analysis to estimate the contribution to total parcel value made by various features of land and improvements.