How is property classified?

Property is classified according to how it is used. For example, a state may have multiple classes of property, all of which are taxable. Examples of classes of property are included below.

Property Classifications

Class 1. Agriculture, grazing, livestock, notes, bonds, stocks, accounts receivable

Class 2: Residential, farm, homes

Class 3: Commercial properties

Class 4: Motor vehicles

Class 5: Personal property, except motor vehicles

Class 6: Swamp, vacant, waste or abandoned or undevelopable land   

Property is described using these types of classifications for tax purposes. With classifications like these, governments can tax different parcels differently, or even tax parcels of equal market value differently. For instance, a residential property can be taxed at 60% of market value, while industrial real estate may be taxed at 90%.

Property Use Types

Many properties may actually fit into more than one classification based on use type. Because it may be to the taxpayer’s advantage to be in a certain classification, lawyers can often help one decide how a property should best be classified. Arizona, for example, allows for “mixed uses” when property has more than one legitimate use. This can be used, for example, to lower a higher residential rate to the land rate. So in Arizona, it is not uncommon to mix two of these three most common classes: residential (with a tax rate of 10%), commercial (taxed at 20%) and land (16%).

Property Taxation

Governments collect taxes based on such classifications, but the tax principles involved sometimes don't seem fair to the taxpayers. This is sometimes because the unequal taxation is used to encourage (or discourage) certain types of building, land use planning, and even business. However, this does not mean that taxpayers cannot challenge, or change, the way their property has been classified. In fact, taxpayers have rights to challenge regardless of the system's fairness or even accuracy.

Getting Help

Keep in mind that changes to classifications can also be requested by the taxing authority. Taxpayers must be told of any proposed changes (increases), and it’s important to act quickly to protect your legal rights in understanding such changes. An experienced tax attorney can be an invaluable source of information and guidance in such situations.