Property Tax Assessments
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Invest Web Homepage Real property taxes are a significant portion of the operating expenses of any real estate investment. If your property taxes are unfairly high, the assessment may be challenged with the assessor, a Tax Review Board or in court. Property tax assessments are usually a percentage of the value of the property. The taxable value that a local government assessor places on your property determines your tax bill.
Investors should always monitor a property's assessment as it invariably increases from year-to-year. If you believe it has become excessive or unfair, you can and should challenge the value assumptions, either with the assessor or a Board of Review, and get your property tax reduced. However, if you miss the deadline, you can never get the overcharge back, even if the review board totally agrees with your position and agrees to reduce the amount in the future.
NOTE: Some states, beginning with California, have frozen or limited property tax increases for as long as you own the property. While your tax assessed value may increase with market conditions, your actual property taxed may be limited by some factor like inflation.
What is your property actually worth? The "true cash value" of any real estate is always a "best guess". However, the law requires that tax assessors must try to determine the actual fair market value of the real property being assessed. Some jurisdictions assess property taxes based on a percentage of that value, while others assess a tax based on the average value of similar properties in a neighborhood. Although statutes or court decisions may define what "fair market value" means in your jurisdiction, a variety of other factors may be involved as well.
Some property assessors routinely change the assessment value to the recorded sale price when property changes hands. It is therefore imperative that real estate investors break out the value of any personal property included in the sale on either the purchase agreement or the closing statement. That document should be provided to the local assessor, preferably by a broker or other third party.
Sales of comparable properties The most often used method of valuing real estate is comparing the subject property to recent sales of property with similar characteristics.
The sale of a comparable property with approximately the same square footage, location, condition and use is the best indication of the "true cash value" or "market value" of a property. However, because all properties have some differences, you have to do your best to consider those differences when you use comps to establish fair market value.
You should always pay attention to the local taxing authority's assessment for your property. If the assessment is excessive, you can challenge the assessment and you should be able to get your property tax reduced. If you are uncomfortable with doing it yourself, there are attorneys or other agents that will help, or do it for you. In that case you must have some idea of of how much you may gain and weigh the cost to the likely benefit.
Municipalities No Longer Penalize Improvements Property taxes have long been the primary source of local government and public school revenue. As the cost of education and local government escalated, property taxes began to rise unconscionably and seemingly uncontrollably. Some taxpayers fought back by allowing their property to deteriorate, particularly on the outside, hoping to hold down their taxes. Many others put off needed modernization and other improvements because they "didn't want their taxes to go up". Now most assessors establish a value based on average condition of similar properties in similar neighborhoods. An owner who does not fix up a property is taxed as if he had, and those who improve properties are not usually penalized. Other factors affecting value Appraisers and assessors also look to the potential for further development or redevelopment of a property when trying to determine "fair market value". Factors like access, easements, and nearby development of raw land may affect the value of real estate, as much or more than existing improvements.
Depreciation of the improvements on a property is also a factor. Generally, there is no rule that the property assessor must use a particular depreciation method, such as straight-line, but whatever method of depreciation the assessor chooses to use must be reasonable.
Changing conditions Changes in the property's condition will certainly affect market value. Therefore, damage to the property or it's improvements should reduce the tax valuation, but property assessors don't always make a full onsite inspection, so their assessment may not consider property damage. If a property owner wants such factors considered, it may be necessary to provide evidence to the assessor. However, even that effort may not produce a reduction. Some jurisdictions won't reduce an assessment based on damage unless the damage is permanent. Another aspect to consider is market changes. Some areas of the jurisdiction may have experienced incredible rises and falls in real estate values, but because most assessors don't reassess all properties every year, an old value may no longer be close enough to current value to be fair. Try to reach an agreement with the assessor first if you can. Some courts have found that drops in property value caused by temporary depressions in the real estate market don't necessarily make a property assessment excessive.
The fact that you and the assessor come up with a different value by itself won't necessarily result in a reduced assessment if the matter goes to court. In fact, some courts have held that even excessive or disproportionate valuations are proper unless the assessor committed fraud or acted arbitrarily.
Rental income and capitalization In some states, assessors consider an investment property's rental income as a factor in arriving at its value for property tax purposes. This doesn't necessarily mean, however, that your assessor will rely on your actual rental income if potential rental income is greater. In other words, the assessor may not consider whether your rents are lower than the market will bear, or whether your vacancy rate is unusually high. Replacement cost Another method of valuing real estate is the cost of relacing it. The formula used is usually the cost of reproducing the structures, less depreciation, plus the cost of the land. In some instances assessors have relied on the original cost of building the improvements instead of the current cost, but current cost is more reasonable. Replacement cost valuations are sometimes necessary because there have been no sales of comparable properties in the market. Which method should be used? Which method you use depends largely on the law in your state, but absent laws requiring otherwise, any reasonable method can show evidence of value. The language of the statutes or constitutional provisions authorizing the tax may limit the methods you can rely on in challenging your assessment. For a detailed discussion of valuation, see RHOL's Valuing Income Property e-Course. Only "excessive or disproportionate" valuations are usually deemed improper The fact that you and the assessor come up with a different value won't necessarily result in a reduced assessment from your local review board or the court. In fact, some courts have held that even excessive or disproportionate valuations are proper unless the assessor committed fraud or acted arbitrarily. Courts generally start with a presumption that the assessment the local assessor made is reasonable. What constitutes an excessive or arbitrary valuation is hard to prove. If you present enough evidence that the assessment substantially exceeds the property's value, the presumption may shift to one that the assessment is unfair. How much proof you will need depends on the jurisdiction and, perhaps, on the judge. Approaching the assessor informally. In most jurisdictions, property assessors may be agreeable to discussing and reconsidering a valuation without a hearing. If you have good reasons for thinking your assessment is high, you may want to consider approaching, or having your agent or attorney approach, the assessor with the information you think should have been considered. Whether the assessor will be open to reconsideration or explaining informally the reason for the assessment may depend on policy, the size of the jurisdiction, and how busy the assessor is. Right to notice of assessment You can't complain about the assessment if you don't know what it is. Some jurisdictions mail out notice of the assessment. Others publish it in the paper. Either way, the date the notice is given may trigger deadlines limiting your ability to appeal. As a taxpayer you must be given the chance to question the assessment, but the time and manner of your objection may be specified by state or local regulations. If you haven't received notices of assessment in the mail, you need to find out when assessments are made and how notice is given so that you can exercise your right to object. The bottom line is simple: Your property may be over-assessed. If it is, you are paying taxes you should not have to pay. If you follow the proper procedures for challenging the assessment, and do it in a timely manner, you will likely be rewarded with lower property taxes and a better return on your real estate investment. go back Invest Web Homepage |