The One Expense of Home Ownership That Is Rarely Mentioned or Disputed

Owning a home is definitely an expensive affair, as property taxes can be extremely burdensome. Annual property tax bills tend to rise steadily over time and that’s the reason behind paying the hefty amount paid in property taxes. The taxes keep coming even after paying off the mortgage, which makes it an infinite expense. Most home owners end up paying more at the end of the day and they don’t even understand how their property tax is calculated! Most home owners take their tax assessment at face value and the sad reality is that their property may be over assessed! Now, it is really important to know how your property taxes are calculated so you can take necessary steps to save your hard earned cash without paying a dollar more than you should.

Step 1: Know the process: Local government in your province/state will send a notice within the first few months of the year, although the schedule may vary. You will get a specific contact number with the notice, outlining the steps needed to challenge your assessment usually in the form of phone, email, or fax. There you can get all the details related to making an appeal within a specific tenure of time during which you may challenge or file a case. This time frame varies in different provinces/states, so make sure you are on time. In some provinces/states the time frame is 2 weeks while in others it may be up to six weeks or 90 days. However, the one thing you need to consider is the closing time of the appeal window. You should not miss it under any circumstance as it could seriously hurt your ability to appeal the property assessment or tax.

Step 2: Know your property assessment details: Make a request for your property tax card and review it. The property tax card always comes with the assessment notice and the best part is that most jurisdictions allow you to access it online. You can also ask for a copy of the property tax card from the local property assessment body.

The property card includes information used by the assessment to determine the assessed value of your home such as; the size of your property, the number of bedrooms and bathrooms along with the lot dimensions, primary structure information, access, secondary buildings (such as a garage), etc.

It is really important to check the card very carefully and if you find any mistakes in the assessment then you should immediately request a change and appeal the property assessment before the deadline. At the end of the day it is your hard earned money and you don’t want to waste it without reason.

Step 3: Get a professional’s advice: It is a very obvious fact once you delve into the world of assessment that you won’t know everything about property assessment and that’s the reason it is really important to take a professional help who can find all the hidden issues and guide you through a proper channel, so that you can easily avoid paying additional property tax. Another aspect that the professional will provide is knowledge of the area and the ability to find comparable properties, as well as building a case for you as support in a property tax appeal.

3 Steps For Grieving Real Estate Taxes

Although various localities have specific mechanisms, nearly every one has a process to appeal or grieve one’s real estate taxes. In most cases, this can either be done by oneself, or you can hire someone else (or some company) to do so, for you. Why would someone grieve his real estate taxes? One reason might be because most of your neighbors do so, and you will suffer financially, by not doing so. Another is, if you believe your house is being appraised for more than it should be, and thus, you will being paying more taxes than you need to, or should. Regardless of your reasons for doing so, every homeowner should realize he has certain options and rights, and this article will attempt to touch upon 3 of the basic steps in appealing and correcting something which might adversely impact you.

1. Comparative Market Analysis (CMA): Before you can claim you are being charged too much, you must create and present a basis for your belief. In nearly every locality, one must accumulate realistic, relevant, comparable homes, and compare what they are being charged in taxes, to what you are. For example, if you can locate 5 or 6 homes, which are similar in size, location, property, condition, etc, and their assessed values vary significantly with your home’s, you have created the best initial basis, for appeal. If you are capable of doing so, yourself, you will gain the greatest benefit, but if you cannot, or don’t have the time or inclination, contact a reputable company, to handle this for you. In many cases, these companies will charge you up to 50% of your savings, but remember, that’s still far better than what you would otherwise be paying, etc. In addition, you’ll only be charged the fee, if you receive a reduced assessment, and savings!

2. Show what others pay in taxes (or are assessed): Once you’ve identified the relevant other properties, show how much less they may be paying than you are. This is what you submit as your grievance, etc.

3. Fill out the necessary forms/ paperwork: Depending on your location, this process might either be rather simple, or more complex/ complicated! In either case, you must obtain, and properly fill out completely, all the necessary forms and paperwork. This is another reason many people opt to use one of the companies that provides this service.

While it is your responsibility to pay your real estate taxes, it is not, to pay more than you should fairly do so! If you believe you are being unfairly taxed, relative to your neighbors, follow the grievance or appeals process.

Understanding (and Fixing) Property Tax Assessment

Imagine, if you will, Tinyville, a community of only ten houses. All ten houses were the same size and style, built at the same time on similarly-sized lots, using similar architectural drawings and building materials, each with comparable views and amenities, and each sold to its initial owner for the same price, $250,000. Assuming the fair market value of each of these houses was $250,000, (because after a reasonable amount of time that’s the price at which the sellers and buyers had meetings of the minds, neither being under duress,) Tinyville’s tax assessor valued each property at $250,000, resulting in an underlying total property value of $2.5M for all of Tinyville.

Like any municipality, Tinyville has expenses: police & fire departments, schools & libraries, water & sewer, sanitation workers, judges & clerks, engineers & inspectors, tax assessors & collectors, officials, and secretaries. To keep the math simple, let’s imagine that Tinyville’s annual budget is a mere $100,000, and that it has no other sources of revenue (such as parking meters, local sales or income taxes, or hunting/fishing permits). In order to meet its annual expenses, Tinyville’s tax assessor divides its $100,000 of budgeted expenses (known as a total tax levy) by each property’s proportionate share of the $2.5M total assessed value of the community. Dividing $250,000 by $2.5M means that each house is responsible for 10% of Tinyville’s property tax levy. Each homeowner (or their mortgage bank) gets a tax bill for $10,000.

For years, everyone is happy in Tinyville. The families each have kids in Tinyville’s schools, they march in Tinyville’s parades, and compete in Tinyville’s pie-eating contests. In the natural course of events, two of the original families were more prosperous than others and moved into better digs in Mediumville, one retired to Southville, one got transferred to his company’s office in Westville, and one died in a tragic car accident, but their heirs in Bigville didn’t want to move back to their family homestead. Anyway, five of the homes went on the market and because the market had been doing well for the past several years, four were sold for $300,000… except the one belonging to the heirs of the deceased couple – they let the house fall into disrepair, stopped mowing the lawn, and eventually squatters moved in and started trashing the place. When they finally sold it as a “handyman special,” they got $150,000 for it.

Before any year’s tax assessment becomes “final,” it is sent to each homeowner to review. Each homeowner has an opportunity to dispute the assessment. The five original homeowners continued to be assessed at a rate commensurate with their $250,000 property value, and knowing that many of their neighbors sold their comparable homes for $300,000, they silently accepted this assessment. The four new owners who paid $300,000 each are also assessed at $250,000. Strangely, it is illegal for a municipality to perform a “spot assessment” of individual properties so although the “fair market value” of those four homes has increased by 20% since last appraised, they continue to be assessed at $250,000 each. The tenth home, purchased by the handyman for $150,000, is also assessed at $250,000, but he disputes his assessment. He argues that the fair market value of his home should be based on his recent purchase price, and through the various legal methods at his disposal, he has the house reassessed at $150,000.

Assuming the total tax levy is unchanged at $100,000, what happens to each homeowner’s property taxes? Nine of the ten houses are still assessed at $250,000 each, but the last is now assessed at only $150,000. One might quickly (and incorrectly) guess that the houses with unchanged assessed values would have no change in their $10,000 property tax bill, and that the tenth house would pay just $6,000, but that doesn’t add up correctly; Tinyville needs to collect $100,000 in taxes to balance its budget, and this formula only adds up to $96,000. What actually happens is that the denominator changes, too. Tinyville’s total assessed property value is recalculated based on each property’s assessed value, and now adds up to just $2.4M. That means that each of the $250,000 houses now accounts for just over 10.4% of the total, and is now responsible for that percentage of the $100,000 levy, increasing each of their assessments to $10,417. The handyman’s $150,000 assessed value accounts for 6.25% of the total, so he’s now responsible for just $6,250 of Tinyville’s tax levy.

Some (including the handyman) would argue that the handyman’s house is worth less, and consequently, he should pay less tax than his neighbors. Others (including his neighbors) would argue that his house is the same size and shape, takes up as much land, and places the same demand on Tinyville’s police, fire, schools, libraries, sewers, and other services, and that he should pay the same amount as the other houses. Some (including the original five families) would argue that the resold houses should be assessed at their new, higher market values, and that the new owners should pay proportionally more taxes. Others (including the four new owners) would argue that the fair market values of their homes (as evidenced by their sale prices) are indicative of the actual fair market value of the five unsold homes, despite the fact that those homes haven’t recently changed hands. These are the sort of issues that confound homeowners and plague tax assessors, assessment review boards, and courts in every municipality, every year.

In a perfect world, when the handyman files for building permits to repair and restore his home’s value, the new value he creates by the work he does should bring his tax assessment back in line with the other comparable houses, thereby reducing his neighbors’ percentage of the total tax, accordingly. Unfortunately, not everyone applies for building permits, and not every project even requires building permits. Upgrading your kitchen appliances improves the value of your home without requiring building permits. Many municipalities don’t require a building permit to add a new layer to your roof or to retile your bathrooms. Of course, there are also homeowners who build bedrooms in attics or lofts over their garages without permits, and not every new home buyer is savvy enough to realize that they are paying for such unpermitted improvements. If you complain to the tax assessor that your neighbor has an unpermitted finished basement, the tax assessor doesn’t have the same authority as a building inspector to knock and demand to see that basement so as to tax them appropriately… and not every building department inspector is willing to perform inspections on an anonymous tip, so you may have to go on record as the guy who ratted out his neighbor. Consequently, a lot of home improvements are not reflected on the tax assessment rolls.

Since buying a home in a market downturn gives you the ability to grieve your tax assessment based on its new apparent fair market value, other home owners can actually use your new “fair market value” to argue that their house is comparable to yours, and that their assessment should be lowered, too. This creates added burden on the assessors as they try to determine new values of homes that haven’t recently sold based on evidence created by comparable homes that did. As more and more homeowners grieve their assessments, it reduces the denominator in the municipality’s total assessed value, increasing the actual tax bills for houses for which assessments haven’t been grieved. Naturally, that reinforces the process, inciting more and more homeowners to grieve their taxes, creating more and more work for assessors. However, taken to the unimaginable extreme, in a community where home values have fallen, it may take a few years for all of the homeowners to realize that they are being unfairly assessed (as compared to their neighbors), but ultimately, when the last of them finally grieves his taxes, everyone’s proportion to the new denominator should be comparable to their proportion to the original denominator, meaning that they’ll all on average, eventually pay just about as much tax as they did before. In the intervening years, the ones who got onboard first and had the largest and earliest reductions in their assessed home values will reap the greatest short-term benefits. Some would go so far as to argue that this is fair, like so many other instances in life when the early bird gets the proverbial worm.

The intervening chaos and disparity, however, causes more work, thereby costing municipalities more in assessments, review boards, and grievance hearings. In the worst cases, when grievance processes fail and are left for courts to decide, municipalities have to pay unanticipated refunds to vindicated homeowners, which reduces their immediate coffers and further increases tax levies in subsequent years to make up for those losses. For scholars of economic theory, Keynes would argue that these machinations are a necessary and productive part of the system, and that they employ lawyers who otherwise would earn less; these lawyers rent offices, hire staff, and buy office supplies, and in effect, keep the economy’s wheel turning. Hayek would retort that these legal costs do not so much enrich the system, as they do redirect capital that would have been employed elsewhere, such as the tax savings permitting the homeowners to buy new furniture, hire a gardener, or take a vacation. He would consider these inefficiencies in the tax assessment process an unnecessary cost that allocated resources in a less-than-optimal manner… and I’d tend to agree with him. I don’t know what the solution is, but I know that we should try to come up with a better one.