Last month, we explored the basics of how counties determine the base-year value and the assessed value under Proposition 13 and under Proposition 8, where market value has declined below the base-year value. In Part II of the discussion, we will explore the two most common types of appeal and the valuation process.
An appeal begins with filing an Application for Changed Assessment with the county assessment appeals board (or clerk of the local board of supervisors.) If the application is not available online, a copy may be requested by telephone. Generally, for an escape or supplemental assessment, the appeal must be filed within sixty (60) days of the earlier of the notice of escape/supplemental assessment (the value change notice) or the property tax bill. For all other instances, the appeal on the January 1 lien date must be filed after July 1 but on or before September 15 or November 30, depending on the county. A separate form must be completed, one for each parcel, and except for a Proposition 13 appeal, one for each assessment year. The owner may designate a representative. If more than one reason for the appeal applies, mark all applicable boxes setting out the reasons. A small filing fee may be charged.
Proposition 13 Appeals
For a Proposition 13 appeal, the owner will ask that the original base-year value be lowered. The base-year can only be corrected if there was new construction or a change in ownership within the past four years (or in response to an escape/supplemental assessment). While not required to be stated on the appeal, common reasons for an error in the base-year value may be an assessor error, or the actual purchase price overstated the market value of the property. Property values may be lower due to unusual deal terms, a disguised gift to a related seller, a buyer using the purchase to settle his guaranty, disclosed problems, or some other reason. If the owner can prove the actual value is lower, then the base-year value can be reduced permanently.
Proposition 8 Appeals
For a Proposition 8 appeal, the owner will ask that the assessed value be reduced below the base-year value due to a decline in value. Unfortunately, this problem has occurred for many properties purchased between 2007 and 2009. If granted, the assessed value is temporarily reduced by the amount that the market value is below the “base year” value. So long as the market value continues below the base-year value, the assessed value should continue to be less.
For each of these appeals, the owner must show that the assessed value should be lower. In nearly every case, the best strategy is for the owner (or property manager) to gather documents and present the correct value, rather than to leave it solely to the local assessor to figure out if a mistake was made. Proving value is not as hard as it may seem. For single family residences and duplexes, there is a lot of public information. Zillow, Redfin, county records, and MLS reports can provide similar home sale values. The rule of thumb is that one can go back six months and only forward three months to find close comparable sales. For example, for a January 1, lien date, sales after March 30 of that year cannot be used. Listings alone cannot be used.
For larger rental units, generally larger than a fourplex, the better measure may be based on capitalizing the net income before interest, depreciation and taxes. This allows for determining the value for a rental complex based on similar apartments having different numbers of units, and different conditions/ages. In addition, capitalizing net income may require adjustments to take into account the costs of necessary improvements required to bring property rents and conditions to market levels. Information on other properties may be obtained from CompuStar, MLS listing and Loopnet. Limited sales information may also be obtained from the local assessor’s office. Rules of thumb, such as door price per unit or gross income multipliers, and general sales statistics are usually not considered adequate proof.
Deciding Whether to Appeal
In deciding whether to file an appeal, the size of the reduction should be considered. For example, given the assessed rate of about one percent (1%) each $100,000 reduction in the assessed value yields about $1,000 per year in tax savings. For an owner of a single rental unit, a $1,000 savings may be worth it. But, on a larger complex, because an appeal may require more work, the savings would probably need to be greater.
Another factor to consider is what happens if there is no agreement with the assessor. In that event the appeal must be heard before the local assessment appeals board. In some counties it is heard by the board of supervisors. If designated, some cases may be heard before a hearing officer. The Assessor may require an exchange of documents before the hearing. Sometimes, a formal appraisal report may be required to present to the board. In every case, the property owner or representative must submit to the board or hearing officer copies of all relevant information. An owner should be prepared to respond to the assessor. It may help to bring a copy of a map (e.g., Thomas Guide) and to bring pictures of the appraised property and any other properties used for the analysis to clarify the proof of value. If a reduction is granted, overpaid taxes will be refunded with interest.
Property tax reductions are a significant way to save money for rental property owners. With the changes in property values between 2008 and 2010, this opportunity should be considered where owners feel that they have been over-assessed.