Summary: This week is all about property taxes! In part 1, we discussed how property taxes will likely increase after you purchase a rental property and how to predict how much it’s likely to go up. Today, in Part 2, we’ll discuss how to challenge property taxes over time and lower your property tax bill. Would you like to lower your property taxes? Maybe that’s the better question?
In this two-part series, we’re going to cover two important aspects of property taxes that every real estate investor should know about and understand.
In Part 1, we explored how to estimate what will happen to property taxes after you buy a rental property. Accurate estimates are important for predicting how your property is going to perform because getting this wrong might completely wipe out your cashflow.
Today, in Part 2, we’re going to cover when and how to challenge your property taxes. This is an important concept for all investors because lowering your taxes means more money in your pocket.
Can I challenge property taxes?
Let’s use the example property we used in Part 1 for this discussion on challenging property taxes.
As a refresher, our example property is a $500,000 duplex in Bellevue, Washington that the previous owner bought 20 years ago for $80,000. The property’s assessed value is $300,000, the property tax is $2,463 dollars per year and the mill rate is $8.21.
The year after you bought the property, the assessed value jumps up from $300,000 to $600,000! Your property taxes are much higher than you expected. Now what do you do?
One option is to challenge the assessment of your property, also known as appealing your property taxes.
Did you know that was even possible?
We’ve appealed property taxes on several of our rental units. This is not to say we’ve been successful, but at least we’ve tried!
Remember, when you decrease expenses on an investment property, you force appreciation. That’s because a multi-family property’s value is based on its net operating income.
So, even if you’ve owned a property for 10 years, if you can keep property taxes from increasing even a couple hundred dollars a year, you’re adding value to that property in the eyes of the next buyer. (Plus, you’re adding cashflow to your pocket each and every year.)
Also, keep in mind that 60% of properties are overvalued by assessors, according to the National Taxpayer’s Union. This makes it imperative that you review your property tax statements each year and challenge them if they don’t seem right.
What are the steps to challenging your property taxes?
1. Are there errors in the assessment?
First, when you get your assessment, check out the property’s description and look for errors. For example, plot size, the square footage of the building, or even the number of bathrooms and bedrooms could be off.
In the case of the example duplex above, maybe the land was noted to be 3 acres instead of 2 acres, artificially increasing property taxes.
Remember, when you’re looking at the assessed value, depending on how your city calculates the taxes, the actual assessed value may be only a fraction of the property’s market value. So you need to pay attention to the city’s method for determining assessed value.
2. Is the assessment reasonable?
Next, consider whether the assessment is reasonable.
In our example property, you just bought the property, appraised at $500,000. So you can present that as strong evidence that the City’s assessment was too high.
If you don’t have a recent appraisal (and didn’t want to shell out money to get a new one!), what are your options?
One question you might ask yourself is, “Could I sell the property for this value?” to determine if you think the assessment is “reasonable.” In this case, you know that your property is not going to sell for $600,000 since you just bought it for less, but if you’ve owned a property for 10+ years, you’ll definitely want to use this as a screening question.
Let’s say you looked at comparable properties when you were considering buying the example duplex and all of them had tax rates around $2,000. In most cases, you can collect data from three to five comparable properties of similar square footage and features that have sold within 90 days of your assessment.
Maybe you also have additional data that the assessor does not. For example, perhaps you know the sales price of this property was higher than it should have been because there were $50,000 in repairs that the seller gave you a “credit for” instead of lowering the sales price. Or maybe there was recent damage to your property that would lead to a lower assessment.
Whatever the information you have, it’s worth including it in your appeal to the tax assessor.
What kind of data do tax assessors accept?
Here’s an example from the King County Website about the data they accept with an appeal.
Include all evidence with your appeal, or submit it as soon as possible. An early submission will increase the possibility of receiving a reduction offer from the Assessor without having to attend a hearing. Here are some examples of useful evidence:
- Sales info of similar properties with sales dates close to the valuation date
- Professional cost estimates to fix any structural defects or maintenance issues
- Recorded documents that reference any easements or other restrictions on the property
- Official communications or documentation from city, county, or an environmental agency confirming environmentally critical areas exist on the site, and/ or any development limitations affecting the property
Is this worth my time to appeal my property taxes?
One question you might be asking yourself right about now is, “Is this worth my time to challenge property taxes?” Shouldn’t I be spending my time looking for the next investment deal instead?
Those are great questions!
Not only does it take precious time to challenge property taxes, but there are also a lot of rules governing a successful challenge to your property taxes. (However, if you’re trying to collect hours for real estate professional tax status though you may want to spend those hours!)
For example, in most cases you have only 30-60 days to appeal your assessment. So that means you have to move fast to pull together all the data and get your paperwork filed. Sometimes that means sending in a letter or filling out a notification form depending on your state.
Given all the associated rules and the critical timing and the fact we have so many properties, when Kenji and I decide to challenge our property taxes, we outsource it to someone else.
Wait, someone can do this work for you?
Yes, you can outsource challenging your property taxes. And, the beautiful thing is often you don’t even have to pay for it!
How is that?
The reason is that many of the companies and tax lawyers who challenge property taxes are willing to do a free assessment to see if it’s even worth the appeal. And, if they decide that it’s worth doing the challenge, some of them will even do the work on a commission basis. That means, if you’re successful, they take a portion of the earnings.
While it may be a hefty amount, in the scheme of life, if you do little to no work on the project and you successfully lower your taxes, your return on investment (ROI) is actually infinity!
Just be sure to get a reputable company to help you out. There are some companies out there that have some shady practices and a lot of negative reviews. We recommend doing your homework upfront and asking around to find who other real estate investors are using for their appeals.
You’re finally done reading about taxes!
So now you know how to predict next year’s property tax rate, and you know how to appeal the property taxes of your rentals!
And with those tax savings… you might even be able to go out and get yourself another small investment property.
So what are you waiting for?
