Properties are generally taxed at their cost basis, unless the cost of the property was artificially low, as it might be in a transfer between related entities, a foreclosure sale, or an auction.

Let’s say you buy vacant land for $500,000 and subdivide it. If there are significant costs in subdividing the land (i.e., putting in streets, utility lines, light poles, etc.) then those costs get added to the sale price of the land to determine the new assessed value.

Now let’s say you build five houses, and the cost is, say, $1,000,000. The tax basis of the property is the original purchase price ($500k), plus the cost of subdividing the land, plus the construction cost of the homes.

Assessors typically base the construction costs off of the information that the developer used when applying for his building permit, but they aren’t required to do this.

Sometimes assessment lags the development process, especially in a booming market. Assessors always complain that they don’t have the staff needed to stay current on all the development activity.