October 7, 2015
On September 22, 2015, Mayor Rahm Emanuel released the City of Chicago FY2016 Budget, which includes a nearly $1.3 billion property tax levy, an increase of $427.7 million over the originally adopted FY2015 budget. The property tax levy would be dedicated to the Police and Fire pension funds. In addition, the Mayor has proposed a property tax exemption that would exclude homeowners of homes with a market value of $250,000 or less from the property tax increase. Although representatives from the Mayor’s office testified on September 24, 2015, at a subject matter hearing before the Illinois House on the idea of expanding the General Homestead Exemption, no legislation has yet been introduced. However, it is important to note that the proposal has not garnered support from the Governor of Illinois who also wants to freeze the property tax statewide for two years. In order to aid in ongoing discussions of property tax exemptions, this blog explains what the General Homestead Exemption is, as well as important terminology like assessed value (AV) and equalized assessed value (EAV).
The General Homestead Exemption is one of the many property tax exemptions offered to homeowners on their primary residence. The purpose of a homestead exemption is to reduce the taxable value of a property in order to reduce tax liability of the homeowner. However, due to the nature of the Cook County property tax system, it is important to note that any tax relief going to one group of taxpayers will simply increase taxes for all others. In order to understand taxable value and how it relates to a tax bill, crucial concepts are explained in the following sections.
Assessed Value (AV)
Assessed value of a property is one factor in calculating the taxable value of a property. The Cook County Assessor evaluates a homeowner’s property every three years by examining the most recent sale prices of all homes in a community and comparing that property’s individual characteristics such as “land, location, building square footage, and construction type.”
Based on the previously mentioned factors, among others, Illinois state statute requires assessment officials determine the “fair cash value” of each parcel. This is defined as “the amount for which a property can be sold in the due course of business and trade, not under duress, between a willing buyer and a willing seller.” It is important to note that this “fair cash” or “market” value is not necessarily the actual sales price of a given property, but rather an estimation of what it would sell for on a given date.
Once the Cook County Assessor has estimated the full market value of a property, the class specific percentage “level of assessment,” is applied to that value to produce the assessed value. For residential property, the statutory level of assessment is 10%. So, a house with a fair market value of $250,000 has an assessed value of $25,000 ($250,000 * 10%). For more information on property tax assessment processes see the Civic Federation’s property tax primer.
Equalized Assessed Value (EAV)
The taxable value of a property is not the assessed value. After a property’s assessed value has been established by the Assessor and the Board of Review, another two steps must be taken before taxable value can be determined: (1) the application of the equalization factor and (2) the application of any exemptions. Assessed value is important to understand because the EAV is determined by that dollar amount. State or inter-county equalization is the application of a factor, or multiplier, to all assessed values so that the aggregate total equalized assessed value of the county equals 33 1/3% of fair market value. All counties, including Cook, are required to undergo equalization to ensure that the total value is 33 1/3%. For 2014, the state equalization factor for Cook County was 2.7253, so a home with a $250,000 market value would have an assessed value of $25,000 and an EAV of $68,132 ($25,000 * 2.7253).
Equalization is necessary for the fair implementation of certain state statutes. Assessed valuation of property is a component in formulas for various education, transportation and public assistance grants to local jurisdictions so it is important that assessed values be made equivalent statewide. For example, consider two townships that share a school district. The property tax from both townships fund the school district, but Township A is assessed at a lower rate than Township B, so a homeowner in Township B will pay a much higher property tax, hence the need for the EAV.
The EAV of the property is the taxable value of a home unless the property qualifies for a homestead exemption, most of which reduce EAV. Since the taxable value of a property is the value to which the composite tax rate of the area in which the property is applied to produce the tax bill, a lower EAV translates into a lower tax bill.
The General Homestead Property Tax Exemption
The General Homestead Exemption exempts a flat amount of EAV because virtually all applicants are eligible for the maximum amount. In Cook County only, the General Homestead Exemption is $7,000—in all other counties the exemption is $6,000. Homestead exemptions are permitted only for a primary residence inhabited by the owner (not a second home). Application for the exemptions must be made to the county assessor.
As noted above, the Mayor’s proposal has been reported as being a doubling of the General Homestead Exemption. The increase in the exemption is important because it would change the EAV discussed in the previous section. Using the same calculations as above, the EAV of $68,132 combined with the General Homestead Exemption of $7,000 would have a total taxable value of $61,132. If legislation is passed to double the General Homestead Exemption of the same property then the total taxable value would be $54,132 and would result in a lower tax bill than under a $7,000 exemption. Property taxes in Cook County are a zero-sum game, meaning that tax relief provided to one property owner must be paid for by all other owners because it affects both the total EAV upon which the rate is based and the proportion of total EAV for each property. Consequently, the tax burden is largely shifted to commercial, industrial and rental properties.
For more information about property tax issues, please see the Civic Federation Cook County Assessment Primer and the Cook County Property Tax Extension Primer or previous Civic Federation blogs about equalization factors and property tax uses.