A third home, again comparable to the one that sold for $75,000, is being offere

Question

A third home, again comparable to the one that sold for $75,000, is being offered for sale. The only difference between this third home and the $75,000 home is the property taxes. The $75,000 home’s property taxes are $1,500 per year, while the third home’s property taxes are $1,000 per year. The differences are due to vagaries in how property tax assessors assessed the taxes when the homes were built. In this tax jurisdiction, once annual taxes are set, they are fixed for the life of the home.Assuming the market rate of interest is still 7.5%, what should be the price of this third home? Why?

Explanation / Answer

The difference between the two homes is property tax only.

So, based on property tax the price of the third house should be calculated as follows:

if property tax is $1500, then value of house = $75000

if property tax is $1000, the value of house = ($75000 / $1500) * 1000 = $50000

The value of the third house should be $50000.

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