Understanding (and repairing) property tax appraisal

Imagine, so to speak, 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 period of time that’s the price at which the sellers and buyers met their minds, without being under duress), the Tinyville tax assessor valued each property at $ 250,000, resulting in a total underlying property 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, officials and secretaries. To keep the math simple, let’s imagine that Tinyville’s annual budget is only $ 100,000 and that it has no other sources of income (such as parking meters, local income or sales taxes, or hunting / fishing permits). To cover your annual expenses, the Tinyville tax advisor divides your $ 100,000 of budgeted expenses (known as a total tax lien) by each property’s proportionate 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 the Tinyville property tax. Each owner (or their mortgage bank) receives a tax bill of $ 10,000.

For years, everyone is happy in Tinyville. Each of the families have children in Tinyville schools, march in Tinyville parades, and compete in Tinyville pie eating contests. In the natural course of events, two of the original families were more prosperous than others and moved to better excavations in Mediumville, one retired to Southville, another was transferred to his company’s office in Westville, and the other died in a tragic car accident, but his heirs in Bigville did not want to return to their family home. Anyway, five of the houses went up for sale and as the market was doing well over the past few years, four were sold for $ 300,000 … except for the heirs of the deceased couple – they dropped the house. in disrepair, he stopped mowing the grass, and eventually the 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 is “final,” it is sent to each owner for review. Each owner has the opportunity to dispute the appraisal. The original five homeowners continued to be appraised at a rate commensurate with their property value of $ 250,000, and knowing that many of their neighbors sold their comparable homes for $ 300,000, they quietly agreed to this appraisal. The four new owners who paid $ 300,000 each are also valued at $ 250,000. Interestingly, it is illegal for a municipality to conduct a “spot appraisal” of individual properties, so even though the “fair market value” of those four homes has increased by 20% since the last appraisal, they are still appraised at $ 250,000 each. . The 10th house, bought by the maintenance staff for $ 150,000, is also valued at $ 250,000, but he questions his assessment. You contend that the fair market value of your home should be based on your recent purchase price and, through the various legal methods at your disposal, you have the home reassessed at $ 150,000.

Assuming the total tax collection does not change by $ 100,000, what happens to the property taxes of each owner? Nine of the ten homes are still priced at $ 250,000 each, but the last one is now priced at just $ 150,000. One could quickly (and incorrectly) guess that houses with unchanged appraised values ​​would not change your $ 10,000 property tax bill, and that the 10th house would pay only $ 6,000, but that doesn’t add up correctly; Tinyville needs to raise $ 100,000 in taxes to balance its budget, and this formula only adds up to $ 96,000. What actually happens is that the denominator also changes. The total appraised value of the Tinyville property is recalculated based on the appraised value of each property, and now totals just $ 2.4 million. That means each of the $ 250,000 homes now represents just over 10.4% of the total, and you are now responsible for that percentage of the $ 100,000 tax, increasing each of your contributions to $ 10,417. The $ 150,000 appraised value of the handyman represents 6.25% of the total, so he is now responsible for only $ 6,250 of Tinyville’s tax collection.

Some (including the handyman) would argue that the handyman house is worth less and consequently he should pay less taxes than his neighbors. Others (including your neighbors) would argue that your home is the same size and shape, occupies the same amount of land, and demands the same demand from Tinyville 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 resold homes should be valued at their new higher market values, 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 sales prices) are indicative of the actual fair market value of the five unsold homes, despite the fact that those homes have not been sold. t has changed hands recently. These are the kinds of problems that confuse homeowners and plague tax advisers, appraisal review boards, and courts in every municipality, every year.

In a perfect world, when maintenance personnel apply for building permits to repair and restore the value of your home, the new value you create with the work you do should bring your tax assessment in line with other comparable homes, thereby reducing the percentage of his neighbors. of the total tax, accordingly. Unfortunately, not everyone applies for building permits, and not all projects require building permits. Upgrading your kitchen appliances improves the value of your home without requiring building permits. Many municipalities do not require a building permit to add a new layer to their roof or to re-coat their bathrooms. Of course, there are also homeowners who build bedrooms in attics or lofts above their garages without permits, and not all new home buyers are smart enough to realize that they are paying for such disallowed improvements. If you complain to the tax assessor that your neighbor has a finished basement without permission, the tax assessor does not have the same authority as a building inspector to call and demand to see that basement to properly tax them … and not all of them. A building department inspector is willing to conduct inspections with anonymous notice, so you may have to get on record as the guy who reported on your neighbor. Consequently, many home improvements are not reflected on the tax assessment lists.

Since buying a home in a market downturn gives you the ability to hurt your tax assessment based on your new apparent fair market value, other homeowners may use your new “fair market value” to argue that your home it is comparable to yours, and that your valuation should also be lowered. This creates an additional burden for appraisers when trying to determine the new values ​​of homes that have not recently sold based on the evidence created by comparable homes that did. As more and more homeowners mourn their appraisals, the denominator in the total assessed value of the municipality is lowered, increasing the actual tax bills for homes for which appraisals have not been regretted. Naturally, that reinforces the process, prompting more and more homeowners to mourn their taxes, creating more and more work for appraisers. However, taken to the extreme unimaginable, in a community where home values ​​have fallen, it may take a few years for all homeowners to realize that they are being unfairly appraised (compared to their neighbors), but ultimately When the last of them finally mourns their taxes, everyone’s ratio to the new denominator should be comparable to their ratio to the original denominator, meaning that everyone, on average, will eventually pay almost the same amount of taxes as before. In the intervening years, those who came on board first and had the largest and earliest reductions in their appraised value will see the greatest short-term benefits. Some would go so far as to argue that this is fair, like so many other cases in life where the early riser gets the proverbial worm.

The chaos and disparity involved, however, cause more work, costing municipalities more in evaluations, review boards and complaint hearings. In the worst case, when the complaint processes fail and the courts are left to decide, municipalities have to pay unforeseen refunds to claimed homeowners, reducing their immediate coffers and further increasing taxes in subsequent years to make up for those losses. For students of economic theory, Keynes would argue that these machinations are a necessary and productive part of the system, employing lawyers who would otherwise earn less; These lawyers rent offices, hire staff and buy office supplies, and in effect keep the wheel of the economy going. Hayek would reply that these legal costs do not enrich the system so much, but redirect capital that would have been used elsewhere, such as tax savings that allow homeowners to buy new furniture, hire a gardener, or take a vacation. He would view these inefficiencies in the tax assessment process as an unnecessary cost that allocated resources in a less than optimal way … and I would agree with him. I don’t know what the solution is, but I know that we should try to find a better one.