The Appeal of Taxes

It seems to have been a while since I last wrote on real estate, but I haven’t for­got­ten about it, in fact I’ve made sev­eral invest­ments in it recently.

Real estate deals can take a lot of time to com­plete, and in each you can usu­ally learn some­thing, and I learned plenty recently, so I expect to be writ­ing more arti­cles on real estate in the near future, now that things are com­ing to an end.

How­ever, I’ve recently received some mail which did trig­ger an idea for a quick article…my Tax Notices for 2012…

In the past, many cities had very con­vo­luted ways of assess­ing house val­ues but, more recently, many places are going to “mar­ket value assessments”.

Now, think of city taxes like a big pie made of the worst things on earth, and your mother is stand­ing right behind you…you don’t want to eat any of this thing, but there’s no get­ting out of it. You’re best bet is to try and min­i­mize the amount you’ve got to con­sume. At times like this, it’s best to vol­un­teer to hand out pieces, so you can ensure you’re not stuck with the biggest piece.

Munic­i­pal taxes work much the same way. The munic­i­pal­ity decides it needs X num­ber of dol­lars. It then counts the num­ber of build­ings, and divides the amount of money it wants, among the var­i­ous build­ings based on the value of the build­ing. If your build­ing is worth more, you get a big­ger slice of the pie.

This is why they send out assess­ments in Jan­u­ary, and limit the appeal time. They need to fig­ure out how big to make each piece.

Now, most home­own­ers think that the more their house is worth, the bet­ter things are for them. While that is true in most cases, it’s not true when it comes to taxes. The more your house is worth, the more you’ll pay in taxes, so I’d rec­om­mend you invest in a lit­tle research and a phone call.

Recently, I just bought a place. Three years ago the place sold for $178,000 (way too high, even for the times…but that’s a dif­fer­ent story). This year, the tax assessed the same place for around $125,000. I bought the place, out of fore­clo­sure, for $71,500. Most of the build­ing is in fore­clo­sure, so all the “com­pa­ra­ble prop­er­ties” are also sell­ing around that range. This is a great case for a call to the city tax department.

Most of the time, the tax depart­ment will adjust your assess­ment if you’ve got a pretty good case, right over the phone. If they don’t, there is always an oppor­tu­nity to file an appeal. If you’re going to file an appeal how­ever, there is usu­ally a fee asso­ci­ated with fil­ing, not to men­tion the time it takes (which costs you money) so, at the end of the day, you’re sav­ings, if you win, need to be worth it.

In the case of the $71,500 prop­erty, it would be worth the appeal, since my prop­erty is assessed at nearly dou­ble. Now, taxes aren’t usu­ally based on a lin­ear scale, mean­ing if my assessed value is decreased by half, I doubt my taxes will be cut in half, but I should see, and expect, a sig­nif­i­cant reduc­tion. Any money I don’t have to give to the gov­ern­ment, is good money.

Now, while I was on the phone to the tax peo­ple, I had them take a look at my other prop­er­ties. I’ve found, more often than not, that they are will­ing to decrease their assess­ments just for ask­ing. Prob­a­bly because so few actu­ally phone and com­plain, and it’s an easy way to keep peo­ple happy… It’s not like they’re not going to get the money.

Remem­ber, your slice of munic­i­pal taxes is rel­a­tive to your neighbour’s. If the gov­ern­ment wanted to col­lect $100,000, and there were only 100 houses each val­ued at $1, your taxes would be $1,000 ($100,000 divided into 100 homes of equal value). If only your house was val­ued at 50 cents, your taxes would be $502.03, while every­one else pays $1,005.03 ($100,000 divided into 99 houses of equal value plus one house of half the value). Either way, the gov­ern­ment gets $100,000.

If you have to appeal, there are two options. The first is you can hire a com­pany to appeal it for you. They usu­ally work on a con­tin­gency basis (tak­ing up to half of your sav­ings), so for them to take the case your tax sav­ings have to be sig­nif­i­cant. The com­pa­nies will gen­er­ally search out some com­pa­ra­ble prop­er­ties, and appear before the appeals board. They do this all the time, and the appeal basi­cally goes some­thing like this…litterally:

“Hi Bob.”

“Hi guys”

“So Bob, same old same old?”

“Yep, I’ve got the list right here…”

“Okay, looks good, we’ll reduce it by X%”

“Thanks guys”

“Next case”

Great job if you can get it.

The other option is for you to appeal it your­self. This can be a rather fun expe­ri­ence. You get to stand up in front of a small group of peo­ple, and make a case for why the value of your prop­erty is too high. Then the city presents rea­sons why it’s not. and the board rules.

I did this sev­eral years back when I had an office in a city run build­ing. You see, tech­ni­cally, city build­ings are exempt from taxes, but I was a for profit busi­ness inside a city build­ing, so I had to pay prop­erty taxes on top of my rent. In other build­ings the taxes are included in the rent. I decided to appeal my tax bill whereas other busi­nesses all hired the same com­pany to do the appeal for them.

I watched as the com­pany did the appeal for the other and it went much like I described above. I then had my turn.

I pointed out that I was pay­ing an indus­try aver­age rent, but my taxes were not included which looks like the city was double-dipping. I pointed out I had no con­trol of the build­ing, no sig­nage rights, that the build­ing was in need of repairs (I had taken pic­tures of every crack, smudge or piece of dirt I could find) that were not being done, as well as any­thing else I could think of in a neg­a­tive way. Finally, I pointed out the his­tory of this build­ing (which the city had val­ued at $11 mil­lion dol­lars). It was orig­i­nally designed to for Cal­i­for­nia, there was only 40% of the build­ing that could be rented out ever, the rest was “com­mon area”, and that, being a city owned build­ing it was tech­ni­cally tax exempt. To sum up, I pointed out that I owned no land sur­round­ing the build­ing (also part of the assess­ment) and that the build­ing was close to worth­less because no one in their right mind would ever build such a fiasco…

The city, for it’s part, tried to show com­pa­ra­ble prop­er­ties, but I quickly pointed out thatthey were office build­ings where 90% of the space is rentable, so they were thrown out…

In the end, my taxes wound up being a quar­ter of those who didn’t appeal and half of what the com­pany won for the busi­nesses that did appeal (my vic­tory didn’t even help peo­ple in the same build­ing, in fact one guy with an iden­ti­cal office used mine as a ref­er­ence but they didn’t match my bill, which I think is totally unfair), and stayed low for every year I was there. I had a fun time, and saved a bun­dle of money.

About 5–7 years back, the city did, what I though was a bril­liant move. When they first switched over to “mar­ket value assess­ments” they low­ered their esti­mates on prop­er­ties to well below retail val­ues, so there was no chance of appeals. Basi­cally they could divide up the pie any way they wanted, and you couldn’t really com­plain because there was no argu­ing your prop­erty wasn’t worth more…which would mean a tax increase. This was just one way a place can “rig” the rates. For­tu­nately for me, but not so much the city, a few years ago, they went to the other extreme, and over esti­mated nearly everyone…they got a record num­ber of appeals that year…those who didn’t appeal had huge val­u­a­tions for years, and still do result­ing in them eat­ing a big chunk of that pie.

Now, for those of you wor­ried about the value of your prop­erty drop­ping inten­tion­ally, don’t be. Real estate is always only worth what some­one is will­ing to pay for it. While I have seen other list­ings used as a nego­ti­a­tion tool (sim­i­lar prop­er­ties in the neigh­bour­hood), I have never seen some­one pull out the tax assess­ment, unless it was to show how LOW the taxes are. Which is totally mis­lead­ing any­way, since the sell­ing price will set the bar for any future taxes.

Les­son: If your property’s assessed value is high, phone and maybe appeal the assessed value. If it just seem high, make the phone call and ask, it doesn’t cost any­thing and may save you a few bucks. If they are low, keep your head down and hope no one notices.

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