For most of the last decade, property tax assessments increased year over year with the rate of appreciation. Local municipalities structured their annual budgets around projected increases in revenue from gradual hikes in property assessments. Much like real estate appreciation, you could bank on property taxes increasing to keep pace. However, in 2008 as the market came to a screeching halt, local municipalities didn’t necessarily follow suit. Even in 2011, as it became clear that the depressed housing market was not going to recover any time soon, many municipalities continued to assess property values at inflated values more indicative of pre-recession levels.
I have found that for most of the properties I purchase as investment properties, the property taxes are assessed for much higher than my investment. With so many local governments struggling to cover budgetary needs, it makes sense that they want to squeeze as much revenue as they can out of homeowners. However, as a real estate investor, I want to make sure I am not being held responsible for more than my fair share.
For most investors, cash flow is calculated based on income minus expenses – where real estate taxes are simply a line item on the expense side of their profit and loss statement. While this is indeed where it belongs, I believe many investors don’t take the time to question their property tax assessment or research what it would take to appeal the assessment. Most jurisdictions have a formal process for appealing a given assessment. Whether it’s a 30 day window or a 120 day window after assessments have been made, homeowners almost always have the ability to appeal the assessment provided by their municipality. While some investor may choose to hire a consultant or attorney to handle the appeal, I have found that most jurisdictions have a fairly straight-forward process for appealing an assessment without the need for help.
In most cases, property tax assessments are inflated as a result of legacy data (i.e. values that reflect old real estate data). The simple way to appeal this would be to either obtain an official appraisal or provide the appeals office with a list of comparable sales near your property that reflect a lower price than your current assessment. If 5 similar homes in your neighborhood are assessed for an amount lower than yours or recently sold for less, chances are you have a good case for an appeal.
Another common problem with tax assessments is inaccurate data regarding the property itself. It’s actually amazing to me often I find the tax record conflicting with the actual property. Whether it’s an inaccurate number of bedrooms or an inflated square footage figure, it’s important for investors to understand how the tax assessment is being calculated.
Most investors are careful to buy properties that meet their cash flow objectives. They carefully calculate mortgage payments, hazard insurance, property taxes, vacancy rates, maintenance costs, etc. in an effort to maximize the cash flow on a given property. However, many don’t take the time to analyze the possibility of a reduction in property taxes. Is it possible that the cash flow for a given property could increase if the property taxes could be lowered? With the inaccuracy of property data and the inflated values many jurisdictions still have on the books, investors should be careful not to miss an opportunity to increase returns by reducing their tax assessments.