Understanding Property Taxes

Purpose

• Focus of this workshop:

– Help us understand how residential properties are assessed and taxed

– Understand how foreclosures/Short Sales affect assessments

– Provide an understanding of when it makes sense to appeal tax assessments

– Provide direction on how to prepare and present an appeal to a Board of Review

Tax Day

• For valuation purposes, the question is, “what was the true cash value of the property as of December 31st of the preceding year?”

• SEV is Assessor’s estimate of the value of the property as of December 31st of the preceding year.

Mass Assessing v. Singular Appraisal

• Mass– Assessors usually define “neighborhoods” within

their jurisdiction and then use recent sales within those neighborhoods to determine the percentage they will raise or lower all assessments (SEVs) within each “neighborhood”.

– When properties sell within a neighborhood, those sales are used to determine how to adjust the entire neighborhood (up/down/how much).

– The SEV of a sold home does not automatically adjust to 50% of Sold Price.

• Singular Appraisal– Values single property to its unique characteristics

Residential Real Property

Michigan State ConstitutionAssessment must not exceed 50% of its true cash value.

Section 211.27(1) General Property Tax Act defines true cash value: …the usual selling price at a place where the property to which the term is

applied is at the time of assessment, being the price which could be obtained for the property at private sale, and not at auction sale except as otherwise provided in this section, or at a forced sale…

“True Cash Value” is synonymous with Fair Market Value

Price and costs are not necessarily synonymous with value

Components of Market Value

• Most probable price• As of specific date (Dec 31, prior yr)

• In cash, or terms equivalent to cash

• Reasonable exposure in a competitive market

• Fair sale w prudent buyers and sellers

• No undue duress

Three Approaches to Valuation

• Income Approach– Based on Cash Flow generated by a property– Used primarily for income properties

• Cost Approach– New/Replacement Cost – Depreciation + Land Value

• Sales/Market Approach (most frequently used)

– Compares subject property to similar listings and sales.

Assessment Notice – 3 values

• Assessed Value (SEV) – Normally 50% of True Cash Value

• Capped Value– Last year’s Taxable Value x lesser of 5% or CPI

(2009 is 4.4%), unless transfer of ownership

• Taxable Value– Lower of SEV or Capped, unless transfer of

ownership

*If physical property change: Last year’s TV minus losses/additions multiplied by the CPI plus any additions

Historic Michigan CPI Multipliers

• 1995—1.026• 1996—1.028• 1997—1.028• 1998—1.027• 1999—1.016• 2000—1.019• 2001—1.032

• 2002—1.032• 2003—1.015• 2004—1.023• 2005—1.023• 2006—1.033• 2007—1.037• 2008—1.023

• 2009—1.044 (1.044 = 4.4% increase)(49.2% Increase Since 1994)

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$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

CAP

SEV

Possible Cap/SEV Curve

Taxable will be lesser of Cap or SEV

When a Property Sells

• The following year, the property is “uncapped” and the CV and TV are set at the level of the SEV (plus or minus adjustment for appreciation within that neighborhood during the preceding year).

• When property sells, Assessor DOES NOT use the sales price to set a new SEV!

• Assessor does use sales price as comp for adjusting “neighborhood” SEVs

Property Tax Formula

TV x Millage Rate = Property Tax

Example:

TV = $100,000Millage Rate = 45.234 (per 1000 TV)

Administrative Fee = 1%

$100,000 x (45.234/1000)= $4,523.40 x1.01= $4,568.63

How Can Taxes Keep Going UP While Property Values Go Down?

• Taxes will go up while values decline when there is:– A. a gap between SEV and Capped Value; and– B. Inflation (Consumer Price Index increases)

• In 2009 the CPI rose by 4.4% – Biggest single year increase since prior to 1994

Scenario 1: Should I Appeal?

Situation:

If I can prove TV and SEV are both greater than 50% of the True Cash Value?

Answer: Yep!– If successful, will get tax relief for this year.– SEV, CAP and TV will also be reduced to a

new starting point for future years.

Scenario 2: Should I Appeal??

• If I can persuade Board of Review that SEV (but not TV/Cap) is greater than 50% of the True Cash Value?

Maybe– Will get no tax relief for this year—no difference– May improve marketability if planning to sell this year. (reducing

future tax commitments of new property owner increases value).– While it may not affect immediate tax obligations, it will help

close the gap between CAP and SEV sooner.– Goal: Get SEV to Drop Below CAP

Scenario 3: Should I Appeal?

• If I finished the basement and 3rd floor and added a great new bath that the Assessor may not have gotten around to considering in my taxing yet?

– You can Win– You can Split– You can also Lose

– Beware you can be opening up a can of worms. Assess your own risks involved, and associated rewards gained in appealing. Think!

Just Bought Previous Year

• Recent Sales Price in itself is not proof of True Cash Value– Need to establish that price paid is best indicator of true cash

value if you want to use it as such• arms-length transaction• on the open market and available to all potential buyers for a period

of time– pull listing histories when available

• no unusual duress or urgency to sell• Foreclosures???

– Typically not considered valid as comps, unless they are common place enough that they warrant consideration

– Most Counties/Municipalities Now Consider… – Unclear in Livingston County… assessor won in trial court last year– 2008, 2009, most jurisdictions do consider relevant foreclosures– Don’t assume… must show foreclosures are “the norm”

Tentative Board of Review Schedules

• GPP March 17, 19– Notices by March 1

• GPC March 16, 17– Notices by end Feb

• GPF March 10, 23• GPW March 10, 24

– Notices by end of Feb

• GPS March 3, 9– Notices by end of Feb

• HW March 23, 24– Notices 2nd wk of Mar– HW overall is going

down 19%– Bring an Appraisal

• SCS March 3,5,9,10– Notices by end of Feb

Preparing for Board of Review

• Professional Help (appraiser / broker) or Self Help• Remember, to get a tax reduction for the current year…

at the Board of Review, Homeowner needs to demonstrate to the Board of Review that TV exceeds 50% of the True Cash Value (what the SEV should be) of home as it sat on December 31 of the prior year.

• Burden is on taxpayer to persuade Board of Review that Taxpayer’s Value is more valid than Assessor’s Value– Tools

• Comps• Market Trends• Anything to support my position that “as of December 31st, the value

of my property was $___________– Keep it Clear, Focused and Simple!

What Matters?

• Value!

• The only question at most Board of Review appeals is:– Does my SEV exceed 50% of the market

value of my home?• If you can persuasively demonstrate it– you’ll win a

correction (maybe not all you wanted)• If you don’t persuasively demonstrate it– you lose

Sales Comparison/Market Approach

• Approach most often used for assessing and appealing residential property taxes.

– Considers specific recent comparables that match as closely to subject as possible

• Wayne County… Assessor Comps

• 10/01/2007 thru 9/30/2008– Preparer may want to incorporate Market Trends to

illustrate values have risen or fallen between the time comp sold and “Tax Day” (Dec 31 of previous year)

REO PVA for Tax Appeals

• In anticipation of this year’s demand, Real Estate One / Johnstone & Johnstone have rolled out a PVA program– Property Value Analysis for homeowners to

use in appealing taxes– $195 to homeowner– if you need one, email J&J Mgr,– Randy Repicky… randy@repicky.com

Presenting Appeal

• What to Do– Walk in with a smile on your face -- Be Nice– Be Credible– Your job is to “sell” your position to a group

that has been sitting for hours listening to people gripe.

– Be focused – you are only going to have 5 to 10 minutes to present your case and answer questions

Presenting Appeal

• What Not to Do– Attack / Complain– Don’t compare the taxes you pay to taxes

your neighbors pay (this is usually irrelevant for appealing purposes)

– Don’t ask “how can my taxes go up when property values are declining?” – they can, and will until the gap between your SEV and CV closes.

Results

• Typically there is no immediate answer provided by Board of Review– Usually receive response in the mail a few

weeks later.– When results arrive, there are typically

directions provided for appealing

Appealing Board of Review Decision

• Instructions for Appealing provided with the Board of Review Results

• Typically Residential Appeals go to Small Claims Division of Michigan Tax Tribunal– Informal Process– Advanced Discovery Required—parties exchange

evidence in advance (per provided directions)– Hearings approx 30 mins– Non-complex appeals– Usually held in same or adjacent county– Some now done by telephone– Currently 2 years behind… processing 2007 appeals.

Other Items to Review

• When looking at your assessment notice, also look for:– Improper uncapping of taxable values– Clerical errors– Principal Residence Exemptions– Other errors

• If Appealing, you may also want to check the Assessor’s “Field Sheet” to make sure it is accurate.

Michigan On-line Resources:

• www.michigan.gov/taxes – (see Property Tax link on left)

• www.michigan.gov/treasury – (see Property Tax Explanation under “What’s New”)

• www.legislature.mi.gov/documents/publications/taxpayersguide.pdf – (2008 MI Taxpayer’s Guide for 2007 taxes)—65 page pdf)

• http://www.michigan.gov/documents/l4035f_2658_7.pdf– The link to the form for Petition to Board of Review

Questions?Tax Dates

• December 31 of prior year = tax day (what was property worth on that day?

• Mid February… Notice of assessments go out. Look to see Board of Review dates (usually mid March).

• Schedule Board of Review appt immediately. Will fill up fast this year.

• If you miss Board of Review, you miss your chance to appeal until following year. (Residential only)

• May 1 is deadline for filing for homestead exemption