Normally, when you finish a basement, you have to apply for permits before you can make any structural, electrical or plumbing changes. The amount that the improvement will increase your property taxes depends on the extent of the project and how much it increases your home’s value. The amount of an increase in your taxes that comes from making home improvements also depends on the tax district’s mill rate.
Local Tax Dollars
Municipalities rely heavily on real estate property taxes to fund local government services, community programs and schools in the community. It's the job of the county assessor’s office to estimate how much a property is worth, usually based on its fair market value or the price a buyer would be willing to pay. Along with the assessed value of your home, how much you pay in property taxes is determined by the tax rate set by local government officials. Tax rates are calculated according to a municipality’s budget needs.
Role of Mill Rate
Because the mill rate a local tax district levies is based on a percentage of your home’s value, how much your property is worth factors into the taxes you pay. The value of the property is multiplied by the mill rate the county uses in calculating the amount of the real estate tax you owe. Property tax laws vary, but in many cases, renovating an unfinished basement into a livable area is considered new construction, which increases your home's assessed value. Consequently, you could see your property taxes go up, points out Realtor.com.
Local assessors use the market, cost or income methods to arrive at a property’s market value. The market method looks at what other homes in the area that are similar in size, age and condition have sold for in recent months. Another valuation method considers how much it would cost to replace the home by calculating the current cost of building materials and labor and then deducting for depreciation. Sometimes an assessor will also consider how much income a property would generate if you used it as an income-producing property.
Although municipalities and counties differ in the types of projects that require a permit, you generally need a permit to make changes, additions or alterations to your home. When assessing a home’s value, a tax assessor often checks to see if any permits were recently filed on the property. Consequently, if the local code enforcement office requires you to apply for permits to finish the basement, making changes could lead to an adjustment to your home's assessed value. Depending on the cost of the project and whether the tax district where you live counts the additional square footage as living space, the assessor's office may revalue the property.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.