The earlier column “Taxed to Death? – Part 1 of 2” provided some history for how Eliot finds itself at the center of a policy debate about inequitable property tax payments by residents in newly “gentrified” areas and potential risks to us/them presented by some Legislative discussions. There was fear at the time the Legislature would make changes that would radically increase taxes in Eliot. That is not likely in this legislative session, but there is a proposal to revise how property taxes are levied that may have that result. The proposal hasn’t passed and just calls for a study to set the stage for that change. Because it hasn’t passed, Part 2 of “Taxed to Death” is postponed for now. Instead, this column provides a summary of the current assessment process. It also responds to a number of questions that have been asked about the prior column.
The State Department of Revenue is responsible for ensuring uniform taxation of properties in the state, although actual taxes are levied and collected at the county level. The guidelines for all counties are similar. Properties are assessed at “real market value” (RMV) using a common set of guidelines for property assessment; however, these are subject to adjustments by each county to reflect actual market conditions. That includes applying different criteria in different neighborhoods and in rural versus urban areas to capture market price trends. Property assessments are to be complete by September 25th each year and bills sent a month later. The tax year runs from July to July. The tax bill you receive in October is based on the Assessor’s estimate of RMV as of January 1st. So, if the Assessor calculated RMV for your neighborhood and your house in April, they adjust that value to what they believe it would have been on January 1. That establishes the RMV and for the tax bill in October. For structures without any modifications, “improvements” in tax language, this method is used for all comparable properties. A different method is used if improvements have been made after the previous tax year. As noted in the prior column, the property taxes that are due are subject to a tax cap established by Measure 50 in 1997, which was a Constitutional amendment and can’t be changed without a public vote. Measure 50 essentially froze the “tax assessed value” at the RMV in 1997, plus an allowed inflation adjustment. Properties that pre-date 1997 have their value (but not their taxes) capped as of 1997. The county is still required to reassess the RMV every year, it just can’t use the current RMV to calculate the tax bill, with one exception; if there are newly constructed “improvements.” New construction IS assessed at RMV; however, Measure 50 limits the “tax assessed value” to a fraction of that, roughly 60%.
There are two situations where a tax reassessment may occur. The first is when improvements are made to an existing structure, such as a new deck. The other is when a wholly new structure is added to an existing property. In the case of the new deck, the assessor estimates how much the new deck adds to the RMV and increases the value of the existing building by that amount. For example, assume your house has an RMV at $200,000 and the deck is estimated to add $50,000 to that. You will be taxed for an improvement of $50,000. Where this gets tricky is when the “assessed value” for tax purposed is wildly different than the RMV; namely, homes built prior to Measure 50. In that case, the “tax assessed value” of the existing home may be $50,000, in which case the new deck would increase it. Assuming a Measure 50 cap of 60%, to $80,000 and nearly double the amount of taxes owed. The same is true for a wholly new structure, such as an ADU.
For new construction, the assessor will probably use a “cost” method to calculate the RMV. In other words, how much it cost to build the structure rather than its market value. The state provides cost guidance so this estimate is uniform across all new structures (with local cost adjustments). Returning to the example above, if a new ADU valued at $200,000 is added to the property instead of the $50,000 deck, the new assessed value will be $170,000 ($50,000 for the Measure 50 assessed value of the existing building plus 60% of the new $200,000 ADU; another $120,000). The new tax bill will be over 3 times the previous bill.
New construction presents a taxation challenge to both the assessor and the taxpayer; you. Recall that assessed values are based on the situation on January 1st. If construction began in June, there would be no improvements as of January 1, since construction hadn’t begun. So your October tax bill wouldn’t reflect the new addition. If the ADU is completed within the calendar year, its value would be added in the next year, and show up in the tax bill in the next October, over a year after construction began. If construction takes 12-months or is spread across two years, this process also extends two years. In that case, the assessed value during first July-to-July tax year is based on the value of the structure as it was on January 1 of the next calendar year. For a project started in June, that would be what was completed over the 6 previous months; an amount less than the value of the finished project. Assuming it is only 50% complete, the new assessed value would be half the value of the completed project. In our example, that would be $100,000 (of the $200,000 total cost) and would be reflected in the October tax bill the year after construction started. Once the project is finished, the value the would be assessed at the full $200,000, but that wouldn’t show up until the next calendar year’s tax bill, because it won’t be until that tax year that the project will be complete as of January 1st. This lag in tax billing surprises many taxpayers as the see jumps in their taxes over multiple years; nothing in the year construction begins, a jump in the next year when construction is complete, and then yet another jump a year after the project finished. This last adjustment usually catches people by surprise.
Assessors monitor improvements to existing structures and land through building permits, site visits, record checks, and notices from the population, say a neighbor. Untaxed improvements, called “omitted records,” result when discrepancies are found between the assessor’s records and field inspections. This can happen when construction was done without permits; however, all construction doesn’t require permits. It can also happen through errors in communication of construction activity between permit authorities and the county and mistakes in the assessment. In those cases, the assessor has the right to reassess RMV for the 5 prior tax years. When that occurs, the taxpayer is sent a notice that provides 20-days to correct an erroneous record. A corrected assessment, including a bill for the 5-years owed, will follow. The taxpayer has a limited time to appeal the assessment, as it can for any tax bill. One problem with property taxation is that it is unlike income or sales taxes. We are used to the income tax process where we self-report our income and taxes and the IRS is responsible for any audits and tax adjustments after the fact. In the case of property taxes, the Assessor sets the tax amount and the property owner is responsible for verifying it is correct, and appealing if they feel it is not. In other words, property owners play the role of “tax auditor” to the assessor, which is just the reverse of what we know from income taxes.