Taking the Mystery Out of Property Taxes and the Appeal Process
As the saying goes, you can’t avoid death or taxes. However, with some knowledge and planning, you can take the sting out of the dreaded property tax assessment that you, as a property owner, receive each January.
Property taxes: one of your biggest expenses
As an investor, you are making a costly mistake if you are not figuring in accurate property tax information in evaluating your potential deals. In the typical 2 to 4 unit rental, property taxes will be one of your biggest expense items. Quite often, taxes can change the interpretation of a profitable deal into a loser. Understanding property taxes and how they impact your investment decisions is paramount to successful investing.
What makes up a property tax?
Let’s first take a moment and investigate what property taxes actually are and how they work.
First, your properties are assessed and taxes are paid to the taxing authority for your local community (i.e. City of Grand Rapids, Ada Township etc.). That’s right. The same entity that assesses your property collects the tax owed.
The taxing authority decides your percentage increase on your assessment each January. This is done each year based on the “Neighborhood Residential Assessment Factor Increases.” (A neighborhood map of the City of Grand Rapids showing percentage increases is published each January and can be viewed here.)
In addition, the authority decides the percentage increase for your taxable value. Assessed value and taxable value are not usually the same. Remember, you pay tax based only on taxable value. Fortunately, taxable value increases per year are limited to a cost-of-living adjustment.
The last variable is the millage rate (often abbreviated as mills). Millage rates are stated in thousandths and are different for each taxing authority. A quick look at your tax bill will tell you what’s being charged. You’ll see items such as: city general op, city refuse, state ed, school operating, county operating, etc. Millage rates are voted on in general elections. If there’s a humorous side to the property tax issue, it’s that we’ve done part of it to ourselves by not voting millage increases down.
How property taxes are calculated
Here’s a quick example of how property taxes are computed. If the taxable value of your property is 100,000 and the total mills for your taxing authority are 29.5555, your property tax formula would be 100,000 / 1000 X 29.5555 = $2,955.50 yearly tax bill.
Owner versus non-owner occupied
Now that you have an idea how property taxes work and how they are computed, we need to address how they can affect an investor’s decision-making process. First, properties are either owner or non-owner occupied. (You will declare this at the closing when you buy the property.) There’s a big difference between these two designations. In Grand Rapids, for example, the owner-occupied millage rate is, at the time of this writing, 28.9281–compared to the non-owner occupied millage rate of 46.7539. If your seller has been living in the house you are buying and you are now going to rent it out, the property tax picture changes dramatically. From our example above the seller would have been paying $2,892.81. However, if you rent the property, your new rate will be $4,675.39. That’s $148 more per month in property taxes! That’s important to know when doing your cash flow projections.
Assessed value versus taxable value
It gets worse. As we reviewed just a moment ago, assessment values are evaluated by taxing authorities each January. Different areas of the same taxing authority will go up different percentage amounts – based most often on sales of comparable homes, building permits and population trends.
Understand that these assessment values can be very subjective. Each year percentage increases in assessed value across Grand Rapids (or the City where you own property) will vary from approximately 4% to as much as 16%. Remember, taxes are based on taxable rate. At present, the taxable rate is limited to a much smaller cost of living adjustment (most recently 3.3%). That means, over time, huge differences can be created between assessed value and taxable value.
The mystery (or miracle) of uncapping
Here’s where it gets even more interesting. Government entities have created a miraculous tool most commonly referred to as UNCAPPING. If there is a sale in the previous year, the assessed value will almost always become half of the sales price. Here’s the miracle: the new taxable value will be equal to the assessed value. Government officials will defend themselves by saying the marketplace has spoken, but it’s strange that I’ve never seen assessed values go down to match a lower sales price. I guess the market can only speak in one direction.
Don’t be caught off guard
This can create a huge tax revenue increase for the municipality and–conversely–a greater tax burden for you. These tax changes to your rental property can combine to raise your tax burden from the first year to the second by as much as $200 to $300 per month.
What can you do?
Property taxes and their impact on your investment properties are a fact of life. However, here are four ways you can prepare to minimize the negative effects.
- Run the “right” numbers. When evaluating a property for purchase, everyone “runs the numbers.” Are you using the right numbers? Always figure your property tax burden on next year’s taxable value and not the current value. Use the new uncapped taxable value from your purchase price. Your goals should be to make sure the property cash flows long-term rather than just the first six months. If you are quick turning real estate investments, increased taxes after uncapping might make your property harder to sell because of the new tax burden.
- Take advantage of the appeal process. Your local assessor’s office can help you in this process. For example, the City of Grand Rapids website has all the required forms and explanations. Most likely, you will receive notice of your new assessed and taxable values in January. The deadline for filing an appeal follows in mid-February. There will be some research involved in preparing your appeal. Neighborhood economic factors, sales comparables and rental averages are some of the factors. The assessor’s office reviews your appeal and will grant or deny it by sending you a new assessed value or a rejection of your appeal. If you are not satisfied at this point, and believe you have a strong case, you can appeal to be heard in front of the Board of Review. Again, be prepared and professional in your approach. This is the final review and the final word.
- File Mathieu-Gast forms. Taxable value increases are limited to each year’s Consumer Price Index. We have already discussed one exception to this rule: uncapping or transfer of ownership in the previous year. The other exception would be new construction or additions to an existing structure. The Mathieu-Gast Act offers some protection and is a valuable tool for rehabbers, and buy and hold landlords. By filing Mathieu-Gast forms, you can protect your improvements from impacting assessed values. Forms must be filed by December 31 each year. The process is simple, and explained in detail in the City of Grand Rapids website. Mathieu-Gast will not protect you if you change the footprint of the structure or there is a transfer of ownership. However, even limited protection from the Tax Man is a worthwhile endeavor.
- Vote. The last remedy may well be the most important. You have to show up at the polls and vote your conscience. Not all taxes are bad, but you are entitled to make your own decision on how they affect you and your business. Take an interest in legislation that affects you. Vote in every election–especially millage elections.
Time for action
Now that property taxes are no longer a mystery and you better understand how they affect your investments, it’s time for action. There are tools here that can save you money and make you more profitable. You just have to apply them and make the effort. If you would like more information on how to appeal your property taxes, attend one of the RPOA’s in depth classes on the subject. Check out the calendar of events or call the office for the next available class.
Written by Tom Koetsier, Real Estate Broker, Real Estate Investor & RPOA Trainer, Grand Rapids, Michigan
Disclosure: This Knowledge Base article is accurate as of the last update. Laws and policies are subject to change. If you have any questions, please call the office. Click here for contact information.