Are you used to seeing big numbers in the “property taxes due” column of tax returns? Property owners in Texas, a state with notoriously high property taxes, may be forced to allocate a “large portion” of their operating budgets each year for property taxes. You should always be looking for a way to increase the return on your investment, and reducing property tax expenses can have a significant impact on your bottom line.
Market Value vs. Appraised Value
Many investors have asked why Texas property taxes continue to rise even though their income has decreased and operating expenses have increased. Because appraisal districts value so many properties, they are often unaware of the “softness” in a submarket. Also, some appraisal districts have been slow to recognize the huge increases in insurance costs. With property taxes being such a significant expense, investors have found that they need to review assessments annually. Most Texas real estate investors appeal their property tax assessment annually.
Why are property taxes important?
Property taxes are one of the largest expenses homeowners incur. In trying to reduce excess property taxes, even sophisticated homeowners may not know all of their rights. For example, the current Texas Property Tax Code allows property owners to seek an equity adjustment based on comparable properties that are properly adjusted.
Is unequal evaluation applied in informal hearings?
The legislature also introduced a provision in 1997 that attempts to allow property owners to appeal unequal appraisals during the administrative hearing process (informal and appraisal review board hearings). Unfortunately, the wording of the statute was not clear. Some appraisal districts have chosen not to consider appeals based on disparate appraisals at administrative hearings. It is unfortunate that many appraisal districts reject administrative appeals based on unequal appraisals. Property owners get very angry when they feel they have been unfairly taxed. Fortunately, most cases of unfair evaluation can be resolved through a court appeal.
Why are properties not evaluated equally?
You may be wondering why properties are not assessed fairly. Reasons include data errors, focusing on recent sales, and inconsistencies in informal and appraisal review board hearings due to the personal element. Since an appraisal district can track more than a million real estate accounts, it’s unrealistic to expect all of the data to be accurate (the sheer number of properties also affects your ability to accurately estimate your property’s value). Overstating the quality of one property while understating the quality of another property could lead to an unfair evaluation. At times, some appraisal districts have focused on recent sales without re-appraisal of all properties in the surrounding area.
Once the preliminary investigation is complete, the homeowner must determine the market value of the property and whether it is in line with the full appraised value. There are three approaches used to conclude market value: cost, income, and market. The property’s occupancy rate, rental rate, operating expenses, net operating income and other factors, as well as sales prices of comparable properties, are valuable sources of information in determining market value. If the property owner determines that the appraised value is higher than the market value of his property, he must file a protest with the local appraisal district. This can be done by the property owner or his designated agent. Property tax protests must be filed by May 31 in Texas; deadlines vary by state.
Preparing for your hearing
Once a protest has been filed, a protest hearing will be scheduled. Four types of data should be compiled for the hearing: pictures of the subject property, an income analysis, comparable sales data, and appraisal comparables. Photographs of the subject property must indicate the quality and condition of improvements to the property. If there is deferred maintenance, document it with photos and offers. An income analysis should include a prior year profit and loss statement and a list of rents for a date close to January 1 of the current tax year (most states use January 1 as the effective date for evaluation). The analysis must also itemize market rent, market availability, and market expenses (including reserve for replacement) to obtain the property’s net operating income (depreciation and debt service must not be deducted when calculating income). net operating).
If your property has above-market rental or occupancy rates or below-market operating expenses, you must make adjustments when calculating net operating income. If you operate your own property, your income analysis should include an allowance for labor and management fees (if not on the profit and loss statement). Income not directly related to the rental of real estate (box sales, truck rentals, etc.) should be excluded. Related expenses should also be excluded. The net operating income is then capitalized to give an indication of the value of the property.
An appraisal may be appropriate to support the conclusion of value. Comparable sales receive strong consideration in the hearing because they are an indication of market value. Sales data for comparable properties over the past year or two should be collected and reviewed. Evaluation comparables receive strong consideration in some evaluation districts but are not considered in others. Pictures of competing properties that are appraised for less than your property can be an effective tool in lowering your property taxes. Prepare a table that summarizes your property and assessment comparables.
Attend your hearing(s) (Appraisal and Informal Review Board)
Once all relevant data has been collected and analyzed, the protest hearing process begins. The initial protest hearing is called an “informal” hearing. The informal hearing involves a meeting between the owner, or his/her designated representative, and an appraisal district appraiser. If the homeowner is not satisfied with the appraiser’s offer, they can move on to the next level of the protest process, an appraisal review board hearing (in some states this is known as the board of equalization). The appraisal review board hearing, also called a “formal” hearing, consists of a meeting with members of the appraisal review board, an appraiser from the county appraisal district (who may be different from the appraisal hearing appraiser informal) and the owner or his designated representative. The Appraisal Review Board panel may set a value that is equal to, less than, or greater than the level proposed by the staff appraiser at the informal hearing; therefore, the offer made at the informal hearing deserves careful consideration.
Most protests are resolved during informal and formal hearings. However, in a small portion of the protests, the property owner believes that the assessed value can be further reduced by filing a judicial appeal. Although few homeowners pursue the final opportunity to reduce their taxes, homeowners do have the option of filing a lawsuit to contest the assessed value. It is probably financially feasible to sue if the court appeal reduces the assessed value by at least $200,000 to $300,000. This general rule is for Texas; it may be higher or lower in other areas. In Harris County, Texas, for example, about 500 to 800 homeowners annually determine that there is still enough of a discrepancy after completing informal and formal hearings to seek an adjustment in assessed value by filing a lawsuit. Litigation in Texas must be filed within 45 days of receipt of written notice of the value established at the formal hearing. This process may result in further reductions in the assessed value; however, it typically takes 12 to 24 months and requires the services of an attorney and appraiser. Although relatively few homeowners know how to file court appeals, they can be a very effective tool in reducing property taxes.
Since property taxes represent such a large percentage of operating expenses, a commercial property owner I know was pleased recently when his consultant reported that the company saved over $123,000 in property taxes. Some homeowners will realize less savings than that, but every little bit helps your bottom line.
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