Understanding Your Property Tax

In my brokerage and counseling work, I consistently uncover problems with the assessed values of my clients’ properties, which often times impacts their property tax bill.  I usually uncover the problems when working on non-property tax projects.  However, I have served as an expert for private landowners appealing, or wondering if they have sufficient grounds to appeal, their property tax bill.  This has led me to employ scrutinous review of all property tax-related documents, regardless of the nature of the project.

I recently completed phase one pricing and marketing disposition work for clients who own a landmark property that is largely conserved.  The property tax issues that I uncovered in that work reminded me of the importance of this topic, and the need to keep property owners abreast of key issues to be on the lookout for.

I thought it would be helpful to start with the basics of property taxation in this entry, and then address key issues in following entries.  I plan to address the topic “assessment of lands encumbered by a conservation easement” next.

A property tax is an ad valorem (according to value) tax levy on the value of property.  Most often, the value of the property used to calculate a property’s tax is its assessed value.  Assessed values reflect a property’s combined land and improvement value.

In the U.S., property tax on real estate is usually levied by local government, at the municipal or county level.  Depending on the size of the community, the assessing body can be one person, a group of people, or an outside firm contracted by the local body responsible for establishing the town-wide property assessments.

The assessor’s, or lister’s, office is where you will find the person or people responsible for setting the assessed values.  Often times, when you are dealing with low-density, rural communities the local assessor will be a volunteer; as opposed to a professionally trained real property valuation expert. Herein lies one of the greatest problems with the rural property tax system in the U.S. – at least in my opinion, and especially when you are dealing with specialty properties (luxury, green, excessively large for the area, etc.).

You cannot expect volunteers to do the work of specially trained professionals.   Consequently, you cannot expect the values upon which property taxes are based to be credible.  The end result is a property taxation system fraught with errors and unfairness.  If that weren’t enough, despite the fact that the errors and unfairness emanate from the taxing authority, the burden of proving the errors and unfairness falls on the property owner.

Based on my experience, property specific tax problems are predominately borne out of the lack of experience of, and inadequate training provided to, the parties responsible for determining the property’s value for tax liability calculation purposes.  It is the lack of experience and inadequate training that causes the more detailed problems that I find, such as inconsistent application of unit values across multiple tax parcels for a single ownership, misapplication of market data, and failure to properly account for a property’s conserved status or deed restrictions.

While property tax systems can be complex, let me simplify by saying that your property tax bill reflects the coming together of two important pieces of information: the tax rate and the property’s assessed value.  The former you have no say over, really.  The latter, however, is subject to challenge.

The property tax rate is set by the taxing authority.  It is often expressed as a permille (amount of tax per thousand currency units of property value), or a mill (one-thousandth of a currency unit).

It is important to pay attention to your annual property tax bill, and understand how it gets calculated.  Unless you are an expert in real estate valuation/ appraisal, you should find an expert in this field to help navigate you through the Q & A process in trying to determine whether or not your tax bill should be challenged (often referred to as ‘grieved’).  It is paramount to work with an advisor who understands the property tax system used in the location where your property is situated.

Many landowners turn to their real estate attorney to provide guidance.  While many attorneys have a firm understanding of the process for grieving a tax bill, most do not have the professional capability to tell you what you most need to know: has the taxing entity properly arrived at my property’s value for determining my tax liability?

If you want to grieve your tax bill, more likely than not, you will be challenging the assessed value placed on your property.  To increase your chances of a successful appeal, you will want to engage a valuation expert.  In a separate entry, I will discuss what you should look for in an expert, and the scope of work and work-product terminology you should be familiar with so that you are sure to engage the expert to do exactly what you need at exactly the right point in the process.

Why should you care about your assessed value and property tax bill?

  • First, the assessed value has a direct impact on how much your property tax bill is. If your assessed value has been erroneously over-stated, it could result in a higher property tax bill and you will want to take timely action to maintain your right to appeal.
  • Second, your property tax bill has a direct impact on your annual carrying costs.  Property taxes are often the highest expense.  Pay what is fair, but it is not always prudent to simply pay the bill without knowing the value was properly arrived at.
  • Third, it illustrates diligent ownership.
  • Finally, you want to ensure accuracy so that if/when you decide to sell the property you can be assured that the tax bill reflects a fair and credible value for your property.  Any sophisticated buyer will review the property’s tax history and annual liability.

How About This For Unfair?
Let’s say your local taxing authority sets your property’s assessed value at $3,500,000.  The millage rate is $20 ($20 per $1000 of assessed value).  Your tax bill reflects an amount due of $70,000. You think this seems unfair, so you hire a valuation expert to give you their professional opinion of your property’s value (they should determine your property’s value as of the same date the town assessed value was set; this is referred to as the effective valuation date, and it is an important factor to get right.  Your expert determines that your property’s assessed value is only $2,850,000, which yields a tax of $57,000. There is a difference of $650,000 in assessed value, which results in a $13,000 discrepancy in taxes owed. You must decide if you want to appeal or not.  If you do, you will need to maintain your expert advisor, and you might want to engage an attorney as well.  You will foot the bill for both experts. Your expert’s opinion will carry the burden of disproving the town’s likely non-expert opinion.   Depending on how far up the chain of appeal you take it, it’s quite possible the town will have to involve its attorney.  If that happens, you, as a taxpayer, will also be contributing to paying the town attorney’s bill.  In essence, you are paying not only for your expert fees, but the expert fee of your opposition.