Every year tax assessors determine the value of a property for real estate tax purposes. One common thread among property owners paying real estate taxes is that they want that number to be lower. A lower assessed value means lower real estate taxes owed. In Massachusetts, state law requires cities and towns to revalue property every three years. Fiscal year 2007 taxes are based upon the property’s value as of Jan. 1, 2006. If you believe the assessor is using a value that does not reflect the fair market value of your property, you have the right to appeal the assessment and ask for an abatement.
An abatement can be applied for by the person who has been assessed or the person who acquired the property after the first of January. Only the current-year value may be challenged. Prior year values and taxes already paid cannot be appealed. The arguments that taxes are simply too high or that they have been going up every year are simply not enough to carry the day. Because the assessment is presumed to be valid, the burden of proof is on the property owner to successfully argue that the property is over-assessed. To do this, hard evidence of its fair market value is necessary.
Building a Case
The first step in any assessment appeal is to know the rules, especially the deadline for filing an appeal with the assessor’s office. The procedures and time frames are usually included with a tax bill when the new values come out. If a property owner somehow misses the literature, an assessor’s office can provide the deadline dates and also what proof is needed based on the type of property owned. In addition, many cities and towns have the information posted online. Make sure to file an appeal by the deadline set by the assessor’s office. Generally, the due date is Feb. 1 in communities that bill quarterly. In towns that bill twice a year, the due date is usually 30 days after mailing the tax bill. Caution – there is no wiggle room here. One day late is grounds for dismissal of an appeal.
The second step is to prepare your case. There are three common approaches to determining the fair market value of real estate for assessment purposes. The market approach uses sales of comparable property during the past year to forecast what they would sell for on the succeeding Jan. 1. If a parcel was purchased within the past year and the purchase price of the property was lower than the assessed value, you can use your closing statement, purchase contract and deed to prove that the assessed valuation is too high. This is more common in a down market. When market values are moving upward, owners can benefit from the lag in assessed values rising.
For a property purchased more than a year ago, a Realtor can pull recent comparable sales data that supports your position. Because no two properties are exactly alike, adjustments will need to be made to the values of the comparable properties. In order to limit the adjustments, the comparable properties should have the following common characteristics: they should be of the same type, in the same neighborhood, have similar land area and be in the same condition. It is also more statistically valid if they were sold in a time frame near the assessment date. If there are no comparable sales, it may be helpful to research comparable assessments. You may find similar properties with lower assessed values than yours. Assessed values are public knowledge in the same way as sales data. Many towns have this information online, or a real estate broker can gather the data.
A second way to argue that a property is worth less than its appraised value is based on the income approach. This method requires more work on your part, as it involves accumulating rent, expense and occupancy data. A discounted cash flow methodology is applied to estimate a property’s value based on the income-generating potential. The goal is to show that the property does not generate much cash flow.
There is also a second income approach method called the direct capitalization method. Capitalization is the process of converting income from a property into an expression of capital value. The capitalization rate, therefore, is the mathematical relationship between the income and capital value. This approach generally requires the services of a skilled real estate appraiser.
The third argument to prove over-assessment uses the cost approach, which involves an estimate of the current reproduction or replacement cost of the building. To do this, an estimated value of the land is added and any possible loss of value (physical, functional or economic obsolescence) is deducted. This approach is used mostly where the property is unusual – for example, it has no comparable sales – or is not rented. An insurance agent may be able to provide a replacement-cost estimate, as can an appraiser using replacement-cost-estimation technology. However, given the significance of the deductions, it makes sense to hire an appraiser with specialized knowledge of your property type to do this research and perform the necessary calculations.
If your local board of assessors should deny your application for abatement (or take no action on your application), there is a second level of appeal action that may be taken. There is a quasi-judicial state agency called the Massachusetts Appellate Tax Board, which conducts hearings on all types of state and local taxes, including real estate taxes. The major difference here is that you are guaranteed a hearing to plead your case.
Don’t Be Intimidated
Successfully challenging an assessed value usually involves a fair amount of work and possibly some capital. If you suspect your property has been over-assessed, it may be worth some initial legwork to see if your suspicion has merit. If so, don’t be intimidated by the process. Depending upon your property, the tax savings of an abatement could be significant.
