Enter A Formula In To Display The Owners Draw Percentage Understanding (and Fixing) Property Tax Assessment

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Understanding (and Fixing) Property Tax Assessment

Imagine, if you will, Tinyville, a community of only ten houses. All ten houses were of similar size and style, built at the same time on similar sized lots, using similar architectural drawings and building materials, each with comparable views and features, and each sold to its original owner for the same price, $250,000. Each of these homes had a fair market value of $250,000, (because a reasonable price is a meeting of the minds of sellers and buyers after a reasonable amount of time, not under duress,) Tinyville’s tax assessor assessed each property at $250,000. , resulting in an underlying net asset value of $2.5M for all of Tinyville.

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

Over the years, everyone has been happy in Tinyville. Every family’s children are in Tinneyville schools, they march in Tinneyville parades, and compete in Tinneyville pie-eating contests. In the natural course of events, two of the original families were more prosperous than the others and moved to better digs in Middleville, one retired to Southville, one transferred to his company’s office in Westville, and one died in a tragic car accident, but. Their heirs in Bigville did not want to return to their family home. However, five houses went on the market and since the market has been doing well for the past several years, four sold for $300,000…except for the homes of the deceased couple’s heirs – who let the house be torn down. Dilapidated, mowing stopped, and eventually squatters moved in and trashed the place. When they finally sold it as a “Handyman’s Special”, they got $150,000 for it.

Before any year’s tax assessment is “final,” it is sent to each homeowner to review. Every homeowner has the opportunity to dispute an assessment. The five original homeowners were assessed at a rate commensurate with their $250,000 property value, and knowing that many of their neighbors had sold their comparable homes for $300,000, they tacitly accepted the assessment. The four new owners who paid $300,000 each are also assessed at $250,000. Ironically, it is illegal for the municipality to “spot assess” individual properties, even though the “fair market value” of those four homes has increased by 20% since the last assessment, they are assessed at $250,000 each. A tenth home, purchased by Handyman for $150,000, is also assessed at $250,000, but he disputes his assessment. Arguing that the fair market value of his home should be based on his current purchase price, he has revalued the home to $150,000 through various legal methods.

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 latter are now assessed at only $150,000. One might quickly (and wrongly) assume that the $10,000 property tax bill for homes with unchanged assessed value would be unchanged, and that the tenth home would only pay $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 as well. Tinyville’s total assessed property value is recalculated based on the assessed value of each property, and now only adds up to $2.4M. This means that each of the $250,000 homes now accounts for more than 10.4% of the total, and is now responsible for that percentage of the $100,000 levy, raising each of their assessments to $10,417. The handyman’s $150,000 assessed value is 6.25% of the total, so he is now responsible for $6,250 of Tinyville’s taxes.

Some (including the handyman) argue that the handyman’s home is worth less, and as a result, he should pay less in taxes than his neighbors. Others (including his neighbors) will argue that his house is the same size and shape, takes up as much land, and makes the same demands on Tinneyville’s police, fire, school, library, sewer, and other services, and he should pay. Same amount as other houses. Some (including the original Five Families) argue that resale homes should be assessed at their new, higher market value, and that 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 true fair market value of the five unsold homes, even though those homes are not recent. Change hands. These are the types of cases that confound landlords and plague tax assessors, assessment review boards, and courts in every municipality every year.

In a perfect world, when a handyman files for a building permit to repair and restore the value of his home, the new value created by his work should bring his tax assessment in line with other comparable homes, thereby lowering the percentage of his neighbors. of total tax, accordingly. Unfortunately, not everyone applies for a building permit, and not every project requires building permits either. Upgrading your kitchen appliances improves the value of your home without building permits. Many municipalities do not require a building permit to add a new layer to your roof or remodel your bathrooms. Of course, there are also homeowners who build bedrooms in attics or lofts in their garages without permission, and not every new home buyer is savvy enough to realize that they are paying for such priceless improvements. If you complain to the tax assessor that your neighbor has an unpermitted finished basement, the tax assessor does not have the right to knock on the building inspector’s door and demand to see that basement so they can be taxed properly…and not every. Building Department inspectors are willing to inspect on an anonymous tip, so you may have to go on record as the person who wrote your neighbor. Consequently, many home improvements are not reflected on the tax assessment rolls.

Buying a home in a down market gives you the ability to abate your tax assessment based on its new apparent fair market value, other homeowners can actually use your new “fair market value” to compare their home to yours, and. That their ratings should be low as well. This creates an additional burden on appraisers as they attempt to revalue recently unsold homes based on evidence from comparable homes. As more and more homeowners are distressed on their assessments, it lowers the denominator of the municipality’s total assessed value, for which assessments are not distressed. Naturally, this intensifies the process, prompting more and more homeowners to file their taxes, creating more and more work for assessors. However, taken to an unimaginable extreme, where in a community with declining home values, it may take a few years for all homeowners to feel unfairly assessed (compared to their neighbors), but eventually, when the last of them finally pays his taxes, everyone’s ratio for the new denominator is their original. Compared to the ratio of the denominator, this means that they will all, on average, eventually pay the same tax as before. In the intervening years, those who got on board first and had the biggest and earliest reductions in their assessed home value would reap the biggest short-term benefits. Some go so far as to argue that this is fair, as are many other instances in life when the early bird gets the proverbial worm.

However, intervening chaos and inequity lead to more work, which in turn costs municipalities more in assessments, review boards and hearing complaints. In the worst case, when grievance procedures fail and are left to the courts to decide, municipalities must pay unexpected refunds to adjudicated landlords, which reduces their immediate funds and increases tax levies in subsequent years to cover those losses. For scholars of economic theory, Keynes would argue that these conspiracies are a necessary and productive part of the system, and that they employ lawyers who would otherwise earn less. These lawyers rent offices, hire staff, and buy office supplies, and in effect, keep the wheels of the economy turning. Hayek would reply that these legal costs do not so much enrich the system, as they redirect capital that would otherwise be employed, such as tax savings that allow homeowners to buy new furniture, hire a gardener, or take a vacation. He would regard these inefficiencies in the taxing process as an unnecessary cost that allocates resources in a sub-optimal way… and I tend to agree with him. I don’t know what the solution is, but I know we have to try to come up with something better.

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