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Property Taxes: Reduce Your Valuation with a Bit of Caution

When you purchase a property, most of us are aware that property taxes are an amount equal to 1% of the value of the property that you purchase (less a homeowner’s exemption, if applicable, plus any special assessments that apply). Your property tax bill amount can then be increased by the County Assessor’s office in one of two ways: 1) The amount of your actual taxes may be increased by 2% per year (if the value of your property has increased). 2) 1% of the value of a major renovation or addition that you do can be added to your existing property tax bill.

Let’s use an example for a $500,000 property. For simplicity, let’s presume there is no homeowner’s exemption and there are no special assessments. Also presuming that property values are going up, this means that your property tax bill will be $5,000 with a maximum the second year of $ 5,100, the third year of $5,202, the fourth year of $5306, the fifth year of $5412, and so on.
However, if you can prove that your property is now worth less than the value you are being taxed, you can have the County Assessor’s office reduce the assessed amount of your property, which will then reduce your property tax bill. Understandably, if we hear of a way like this to save some money, or pay fewer taxes, it usually sparks our interest. Last month, an article by a syndicated columnist in the real estate section of a large paper talked of ‘found money’ by reducing your property taxes in this fashion. If this is something you are considering - use caution (or maybe ‘planning’ is the better word).

© Copyright 2003 Ara Croce. All Rights Reserved. USA.
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Last time real estate went through a market fluctuation, people were barraged with notices from independent companies that said for a fee that they would get your taxes reduced, since your property was worth less than you paid for it. The first thing to be aware of is you can do this yourself without hiring someone or paying a fee. The second thing to be aware of is that this usually is a temporary respite.

Let’s look at what happens if we use the above example. Suppose that we discover that the value of the property has dropped to $450,000. So the second year we get a bill based on this reassessed value equal to $4,500, a rate at which we pay for the next couple of years with the 2% per year added on. In the meantime, property values have started back up in value; it is now year five and your property is now worth $550,000. All of a sudden you receive a property tax bill for $5412, which is equal to 2% a year from the original value. This is $988 more than you had been planning for, based on the $450,000 assessment from the last property tax bill. This happens because the County Assessor keeps tabs on the property values and can go back to the initial valuation when values increase.
They say there are two things we cannot avoid, and taxes is one of them. So, yes you can save some money for a few years. If your property taxes easily fit into your financial budgeting, this may not be a big consideration. However, after receiving calls from a number of clients who had reduced their bills, it seems like the ‘found’ money turned into a big surprise to most.
Planning may be the key if you go this route. With a little planning you can have the use of your own money during those years. If you set it aside, earn a little interest, and have it available when you need it, this could be the best of all worlds.