Did you know that property taxes are the single most expensive operating expense you will pay as a real estate investor?
Additionally, the annual tax amount is highly variable depending on the purchase price, purchase timing, and the previous owner’s recent business plan.
For example, if you are acquiring an asset that recently went through a value-add renovation program, expect the tax rate to go up significantly at your first assessment. Or, if you perform an extensive value-add renovation program, expect the annual taxes to go up significantly at your first property tax assessment.
However, you don’t have to blindly accept the new property tax amount. In fact, after each tax assessment, you are allowed to dispute the new tax amount by filing an appeal. And I’m going to show you how!
After a recent tax assessment, here is the seven step process to determine if you should appeal your new tax amount and, if so, how:
Step 1. Calculate Net Operating Income (without Taxes)
In order to determine your tax rate, you need to determine the assessed value, or market value, of your property. Most commercial property tax assessors use a modified version of the capitalization/income approach. That is, they use the net operating income excluding the commercial property tax and a loaded cap rate to calculate the market value of the property.
So, the first step is to determine the net operating income excluding the taxes.
But which net operating income should you use? Since you are appealing your recent tax assessment, you should use the current net operating income at your property.
Step 2. Calculate the Loaded Cap Rate
Next, you will need to calculate the cap rate the assessor will use to value your property. You can obtain this loaded cap rate by asking the tax assessor. The loaded tax rate is the market cap rate plus the effective tax rate. You can locate the effective tax rate on the county auditor/assessor site. If you want to know the market cap rate used by the assessor, simply subtract the effective tax rate you found on the assessor/auditor site from the loaded cap rate provided by the assessor. Typically, these rates are expressed as mills. Every 10 mills equal 1%.
Step 3. Calculate the Market Value
Divide the loaded cap rate by the net operating income excluding taxes to calculate the market value of the property.
If, for some reason, the assessor uses a different method to calculate the market value (i.e., cost approach, sales comparison approach, or something else), then you will need to determine the market value following that approach. But the above method, the modified income approach, is most common.
Step 4. Calculate the Total Assessed Value
The total assessed value is what the taxes will be based on. You can find the assessment ratio for your market on the county auditor site. For example, in Hamilton County, Ohio, the assessment ratio is 35%. Multiply the market value by the assessed value to calculate the total assessed value.
Step 5. Calculate the Property Tax
To calculate the annual property tax, multiply the assessed value by the tax rate. Again, you can find the tax rate for your market on the county auditor/assessor site. Typically, the tax rate is expressed as mills. 1 mill is equal to 0.1%.
Multiply the tax rate percentage by the total assessed value to calculate your property taxes.
Step 6. Call the Tax Assessor
If the property taxes you calculated are less than the property taxes you received in the assessment, the next step is call the tax assessor to discuss your computation.
You may be able to resolve your differences without going through a formal appeal process. Most likely, the dispute will be over the net operating income used, as the tax rates and capitalization rates aren’t typically up for negotiation.
Step 7. File a Formal Appeal
If you are unable to come to an agreement with the tax assessor’s office, the final step is to file a formal appeal. You can determine the appeal application deadline by either visiting the county auditor/assessor site or by calling the tax assessor’s office
This is the process for determining the tax rate at your property and filing an appeal on your own. Another option is to work with a property tax consultant who specialize in apartments. They will provide you with their opinion on the property taxes. Generally, they will provide you with a report that includes a best case, most profitable case, and a worst-case property tax scenario.
Additionally, you may also want to consider hiring an attorney who specializes in property tax appeals to argue on your behalf.
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Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.
