Have you ever thought your property taxes are too high and not in line with other comparable properties? There is an entire process to appeal your property assessment.
In this guide you will learn:
- The fundamental ideology behind property taxes
- How an assessment value can affect your property’s net operating income, capitalization rate, and market value.
- A step-by-step walkthrough of how to file a property tax assessment appeal
- Additional tips
- Case study
- A free property tax assessment appeal guide
We’ve all heard the famous words of real estate; “Location, Location, Location!” However, all seasoned real estate owners know that there are costs associated with the perfect location.
The most common culprit? Property taxes.
From the beginning, the property is at the center of two opposing forces – the owner and the assessor’s office. As the owner, your goal is to carry the least amount of property tax liability as possible. Meanwhile, the assessor’s goal is to collect as much property tax from you as possible to meet the budget needs of the community. In all 50 states, plus the District of Columbia, property taxes are levied by counties, municipalities, districts, or townships. The revenue from these taxes are then used to fund schools, public safety, as well as street and road improvements.
As the owner, we usually accept the value assessment given to us by the assessor without thinking twice. We assume it is an unavoidable cost of business. We may grimace when we see the increase. And many don’t even know there is an option to challenge this. However, an assessor can indeed be wrong in their valuation.
Assessed value vs appraised value
Remember, an assessment is not the same as an appraisal. While these terms or concepts are commonly confused, they are very different. An appraisal is conducted by an appraiser in order to predict market value. Market value is influenced by lots of factors. Some factors include the condition of the building, proximity to transportation, comparable sales, property amenities to name just a few.
Often times the appraisal is done at the time of sale or refinancing of a property to understand how similar types of properties are valued. Meanwhile, the assessment is the value used by the municipality to calculate property tax. The assessed value, particularly on commercial real estate, focus on what is considered the hard property value looking at the size of the property, the income potential, costs to repair the building or structure.
How property tax is calculated, and why assessment value matters
Before the introduction of sales and income taxes, property tax or ad valorem tax, (meaning according to the value) was responsible for a majority of local government revenue. The property tax is assessed based on the value of the asset. These revenues are in turn set aside by local agencies to pay for the infrastructure and government of the municipality in which the property resides.
The assessed value of the property is determined by an individual known as the assessor. Assessors are trained government officials that determine what they believe is the fair market value of a property. Once the value is assigned, which includes building and land value, it is multiplied by a fluctuating local property tax rate. These property tax rates are generally expressed as millage rates or mill’s – one-tenth of a percent.
However, these assessments are not always accurate to what the market value of the property actually is. Keep in mind, the assessor’s goal is to collect as much tax revenue for the municipality as possible, while the owner’s goal is to only pay what is reasonable. You may also look into this blog post to get an idea about condo property taxes.
A property assessed at $1MM that is subject to a 26 mill tax rate (2.6%), will owe $26,000 in annual property taxes.
You cannot change the tax rate, but you can appeal the assessed value of which that rate applies to. For example, in this scenario, a successful appeal resulting in a property assessment going from $1MM to $700k will result in a $7.8k annual savings.
These tax savings become substantial when one considers the fact that in most states, properties are only assessed every two years (on odd-numbered years such as 2019). However, the appraisal cycle is based on state law and could be as much as every 10 years. Because of this, with our example scenario above, the simple mistake of not appealing the tax assessment costs the owner $15.6k. This alone is enough to drag a property down by 2 percentage points in cap rate.
To show this, let’s assume the property was purchased for $700k. The property has a Net Operating Income (NOI) of $50,000 per annum before the tax appeal while carrying the excess $15.6k property tax liability.
As you can see, an excessive tax expense can impact the property’s performance substantially. In this example, a property tax assessment error alone was enough to cost this property 2 percentage points in its cap rate. Not only does this change the performance of the property, but also the resale value of the property – as commercial real estate is usually priced based on the cap rate.
How to appeal your Property Tax Assessment
Now that we understand the importance of a property tax assessment, let’s talk about how to appeal your property assessment.
Step 1: Organize your evidence
When submitting your appeal, include substantial evidence as to why you believe the property’s tax assessment is too high.
Evidence may be in the form of:
- Purchase price
- Comparable property values
- Professional appraisal
- Evidence of mistakes made by assessor such as sq/ft, lot size, etc.
- Broker’s opinion
If there is any discrepancy shown between the evidence and assessment value, point this out.
We have created a template for gathering the information called Property Assessment Appeal Guide that you can download. This can be filled out ahead of time for in-person meetings. We have also included a Property Assessment Appeal Form Letter Template that can also be used if your municipality requires a written submission. When submitting an appeal, clarity, preparedness, and conciseness count.
Step 2: Submit the appeal
Submit the appeal to your local assessor’s office. In most states, this must be done towards the beginning of the spring season of which you are appealing. In Iowa, this is available from April 2nd to April 30th. Appeals can be filed by contacting your local assessor’s office, submitting an electronic filing to PAAB (Property Assessment Appeal Board), or by manually completing and submitting the Appeal from Board of Review Action form – which can be found through your local department of revenue’s PAAB site.
In most states, appeal decisions are processed between May 1st and May 31st, however, these may be extended to July 15th through requests from the state’s Department of Revenue.
Step 3: Follow up, and wait for the decision.
⏩ Tip: Keep in mind that the assessor’s office is usually very busy during the spring season. Friendly follow up emails and phone calls to the PAAB at your local assessor’s office are generally helpful.
The new tax assessment will go into effect for the year in which you are appealing. Any changes to your assessment will protect the property for that assessment cycle. Be sure to repeat the review and evaluation process for the next assessment cycle.
“Every property owner has the right to protest their assessment value, always protest.”
As you likely have guessed, very few owners appeal their property assessment. However, of those who appeal, a majority are successful. So, why not give it a try.
- For example, in Austin, TX, 94% of commercial property appeals succeeded, and 97% of residential appeals were successful.
- Appeal success rates can be improved with the help of a Tax Appeal Consultant.
- The request of an oral hearing may help your appeal.
Experienced Cedar Rapids, IA real estate developer Tyler Oswood says, “Every property owner has the right to protest their assessment value. If you feel there is a discrepancy, always protest. It is a simple process that can result in huge savings. If you don’t have a decrease you feel is sufficient, you can always appeal to the state level”.Tyler Oswood interview by Kaleb Beining
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In conclusion, tax assessment appeals are an often-overlooked cost reduction technique. In a perfect world, a tax assessment appeal should be made for every property in a portfolio. However, we understand that many owners do not have the time to do so. This is yet another reason why all owners should be using STRATAFOLIO. STRATAFOLIO manages all of your real estate investment analytics and other operating activity in one easy-to-use interface, giving you the time to take care of other aspects of your portfolio – such as tax assessment appeals.
Be sure to check out our guide on Cost Segregation as well as it may give you some additional ideas.
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