Appealing Your Property Taxes
You would think they would be lower, what with the huge drops in property values in the past two years, but when you get your property tax bill, the county actually wants more money. What is the problem? What can you do?
You are not helpless against the property tax bureaucracy. Every state provides for the appeal of property tax bills. With knowledge of your state’s provisions and a few basic property appraisal concepts, you can take on and conquer the great property tax dragon and get over-assessed properties assessed properly. I won’t go into each state’s requirements; you can find those out for yourself by getting information from your county assessor’s office. Besides, they’re all different.
Excessive valuation could be the result of incompetent assessors, clerical errors, a simple failure to take into account factors unique to your property, or failure to keep up with current values. In today’s real estate climate, usually it is the last. Appraisers do not individually inspect each piece of property in the county. They do take into account improvements on individual properties as evidenced by building permits, but the chances of them actually seeing your property is remote. They also do not know the income of properties.
Every property is unique and counties are desperate for money. They count on property owners not appealing their property taxes. One man I know, a former county tax appraiser, told me that the county he worked for would deliberately overvalue properties, assuming that the owners would not take the trouble to appeal the assessment. The county assessor figured the over-assessed income as part of what he would report to the county commissioners for the county’s budget.
Do not challenge any assessment unless there are clear grounds for reduction, and unless you prepare thoroughly. In order to do an effective job, you will have to spend many hours preparing your appeal. That is the reason many landlords choose to have a licensed appraiser take care of the appeal for them. Some landlords figure that their time is better and more effectively spent doing what they are good at, managing their properties. Besides, appraisers’ fees are tax deductible.
Regardless of the time involved, in addition to saving money, there are some excellent reasons for taking care of the project yourself. The primary reason is practice. Going through the appeals process once gets you pretty good at it. Then if you ever have to do it again, it will be infinitely easier.
Grounds for Reduction
All too often the tax assessor has made an error. That error will be in one or more of five places. Those are the grounds you can use to get your property taxes reduced.
1. Mechanical errors: Is the building size correct? Did the assessor make a simple error in computation? Is the lot size correct? That is a figure you can check anytime, all you need is the printout for your properties from the county. County tax records are notorious for being incorrect as to the size of a building. Measure it yourself. If the measured size is egregiously smaller than what the county has, you have grounds to appeal. You might also find a math error. Check everything.
2. Is the assessment out of line with similar properties in the area? The most important test of the fairness of your assessment is not the market value, but the relation to the assessments on other properties in the area of the subject property. For example, if you own a four-plex that is of similar size and character to another one two blocks away, and the other four-plex is valued $20,000 less than yours, you have legitimate grounds for reduction.
3. Did the assessor follow the guidelines? Many states publish a valuation manual that assessors are supposed to use and follow. Usually it is available through your state’s Department of Revenue or Taxation (whatever they call it where you live).
4. Is the property appraised at more than its market value? Possibly all the properties in an area are over-assessed, not just yours. If you are a realtor, you know full well how to do a Comparative Market Analysis. If you aren’t a realtor, call one, he or she can do the job for you quickly and at no cost.
5. Is the assessment on the property legal? Perhaps some part of the property should be excluded from the property tax because of its type. Ownership or use could make it exempt. For example, property leased by a government agency from a private owner is usually not taxed.
The Income Approach: “The present worth of future benefits”
The Income Approach uses the income stream to derive a value for the property. The assumption of the approach is that a property is worth no more than the income it is able to generate. This method is generally used to value apartments, hotels and motels, retail and office complexes, etc. But simply because it is generally used to value commercial and larger residential space does not mean that we can’t use it for our single family rentals, duplexes, triplexes, etc.
The only thing to be careful of when using this approach is the rent we claim. There are two kinds of rent: Market (or Economic Rent) and Contract Rent. Market rent is the rent usually charged for a property of a particular description. For example, a three bedroom, house in a particular neighborhood might get $600 per month. Just because you are charging your brother-in-law a Contract Rent of $350 doesn’t mean that you can use that rent to value the property. You have to find out what the property in question would fetch on the open market and use that figure.
There are a couple of other items that may not be clear on the worksheet. One is the useful life of the property. It is really as simple as it looks. How many years can the property be expected to provide a competitive return? That period may be 20, 25, 30 or possibly even 50 years. It is not reasonable to expect the useful life of property to be longer than the length of a normal 30 year mortgage, though. Just as defendable is the depreciable life allowed by the US Tax Code of 27.5 years.
The other is the tax rate. You must multiply the tax rate by the assessment ratio. If your state taxes at 80% of value, you would need to multiply the tax rate by 80% to get the correct figure. The capitalization rate is calculated differently than normally. The normal capitalization rate calculation net operating income divided by sale price. Calculating that way, however, ends up a circular calculation based on the amount for which you purchased the property and does not show the current value.
With all that in mind, fill out the Income Approach form on page three.
You will have to prove the figure you end up with at the bottom of the form, your proposed property tax, with data from your records. Just filling out the form will not, in itself, prove anything. Remember, the burden of proof is on you, not the county.
Now that you have all the data you need to appeal your taxes, how do you go about it?
Your county assessor’s office will provide you with all the pertinent information and dates you will need to file the appeal. There is no point in enumerating them here, since every county and state is different.
But what you have now is just raw data. What you do with that data will go a long way towards determining your success in the appeal. Here are ten things to keep in mind as you prepare your appeal.
1. Make up as professional a presentation of your case as possible. The more professional your presentation looks, the more likely the Board of Equalization, or whatever your state calls it, will believe that you did the research professionally.
2. Present your case in person to the Board of Equalization. After all the work you have done on research, you want to present it in person, not impersonally through the mail.
3. Tell the truth. After all, you are correct in your own assessment for the value of the property.
4. Limit your presentation to a few of the most important points. Use less than the allotted time.
5. Use visual aids. This is part of your professional presentation. Make the visual aids tell the story with little help from you. Use charts, graphs, diagrams and photographs as appropriate.
6. Save your audience the trouble of taking notes. Summarize the important points in writing and give a copy to everyone hearing the appeal. Later it will refresh their memories when they are considering your case.
7. Keep dramatics and humor to a minimum. They need to pay attention to the points you want them to remember, not your performance.
8. When you can do so honestly, agree with much of what the assessor did. Stress that you do not question his sincerity (even if you do, saying so doesn’t do you any good). By the same token, do not use the presentation as a soap box to complain about property taxes in general (that doesn’t do any good, either).
9. Be considerate of your audience. Be easy to follow. Be alert for signs of interest or boredom. Encourage questions and comments. Stick to the subject. Don’t argue. Simply say “I appreciate your position. Now I’d like you to hear mine.”
10. Make brief, clear recommendations as to what the assessment should be.
Don’t show that the current assessment is improper, show what it should be. You need to make clear what you want them to do: to lower your assessment to a figure you have proved.
What If I Lose?
If the Board of Equalization rules against you, you haven’t lost. You can still appeal to various higher authorities that your assessor’s office should have listed on its instructions. Losing one round doesn’t lose the fight. In fact, in many counties, the hearings boards are notorious for almost always denying property tax appeals, assuming, as the county did with the assessment, that the property owner will just give up and go home.
With proper preparation you can take on the property tax bureaucracy and get your assessment where it belongs. What it takes is lots of hard work and perseverance. The results can be worth hundreds of dollars to you.