“Guy, if I buy this house, will my property taxes be calculated based off my purchase price?”
This is a question I get asked quite often. And is one for which most buyers are surprised to hear the answer. What they are really asking is will their new property tax bill be lower than the property’s current tax bill. Unfortunately the answers to both questions are “No”.
Property taxes are calculated from a property’s assessed value. And while the assessed values of many Washoe County properties are declining [another 15% according to a Tuesday RGJ article], most property owners will not see a decrease in their tax bills. Why?
It has to do with a concept called abatement. In 2005 the state passed AB 489, in part to provide tax relief for property owner. Among other things, this law capped the increase to a property owner’s tax bill at 3% annually (for primary residences). This meant your tax bill in any given year would be, at most, 3% more than your previous year’s bill amount.
It’s important to note that this “tax cap” applied to the amount of your bill, and not your property’s assessed value. Therefore, as property values increase more than 3% annually, while tax bills were capped at 3%, an abatement was created. Abatement is the amount of additional taxes that would have been owed if not for the tax cap.
Think of abatement as a deferred amount than can recouped in later years when property values are declining.
The Washoe County Assessor’s site has a very informative FAQ section covering a variety of topics, and I encourage readers to explore that site to learn more. But if you would like to go directly to an explanation and example of how the tax cap and abatement process works click here: Why did my tax bill increase when my assessed value decreased or did not change?
smarten
As I understand it Guy, the County’s self-imposed 15% reduction in assessed valuations is applied ONLY to the land portion of one’s secured property tax bill. Given this is generally but 30% to 40% of a property’s total assessed valuation, the reduction isn’t that big a deal even if the abatement issue you address did not exist.
But it’s good you raise the real property tax issue because now I’m seeing quite a few properties who’s annual taxes EXCEED 1% of their FMV. In other words, property taxes are now becomming higher in Nevada than California.
new in town
public outrage will require new assessments…just a matter of time
Drive by poster
The County Board of Equalization really could only impact the “land” portion of an assessed property’s valuation to reflect declining fair market values as only the “land” portion of an assessment is impacted by the fair market value of the property.
Improvements are not assessed based on fair market value. Improvements are assessed based upon replacement cost minus depreciation. I don’t see how the BOE could reduce the improvement part of an assessment as the State has determined that the replacement cost of improvements is increasing.
Sully
What drive by poster said is true according to news reports. But, what law allowed them to increase land values from 1998 – 2008 by about 495% in the first place?
Its hard to believe a regular lot in Reno was worth more than the same size lot in Silicon Valley, assestment wise.
Sully
Nevermind, I forgot about Prop 13.
smarten
Sorry to shift gears, but are you out there CommercialLender? Remember we had some discussions about the merits of fractionalized interests in the Truckee Area? My view about them hasn’t changed one iota, but I ran across this one [ http://reno.craigslist.org/reo/1001590463.html ] again [see below] and thought of you.
This is a resale of a 1/17th interest in an Old Greenwood 2,470 square foot “cabin.” Old Greenwood is one of those master planned golf communities on the other side of Highways 267/80 in Truckee. Lots of multi-million dollar homes mostly sold on a fractionalized interest basis. Notwithstanding, my recollection is that one of these [12310 Fairway] sold last September [as a REO] in the $800Ks [I think $850K] so this gives you some idea of their “value.” And given the seller has been trying to sell her interest for a couple of years now, what kind of resale value fractionalized interests really have.
The seller lives in the Grass Valley Area if I’m not mistaken, and she is asking $88K. When I first communicated w/her a couple of years ago, she was trying to get over $100K! I bet you could land something like this, assuming you’re interested in it, for $50K or who knows – even less! There’s simply no market for stuff like this in today’s economy.
There’s a “free” shuttle [actually, you pay for it with your homeowners’/other garbage add on fees] to Northstar at Tahoe [about 10 minutes away], and I think you get so many free lift tickets for skiing/rounds of golf at any of the Tahoe Mountain Resorts golf courses as an owner.
Happy hunting!
First Time Buyer
Ugh. So the person who lived in the house before me didn’t have their taxes go up more than 3% a year but the house price sky rocketed. They then defaulted and now I get it for cheap but i am paying for the higher tax rate that they didnt have to?
So could my taxes increase while in a house that costs about 50% of what it was sold for 2.5 years ago?
What about that article in the paper about lowering everyone’s property taxes by 15%?
So confused…
Move to Reno
My thinking that if somebody bought a new house in 2005 for $800k and was assessed property taxes on that price, then if the house was re-sold in 2009 for $400k the new owner would be entitled to a major reduction in his or her property taxes.
How would a 3% cap affect the new owner?
Drive by poster
Unlike California, the tax abatement does not reset each time a property is sold or not. So, if a property is a SFR, owner occupied and subject to the 3% cap, and the property is sold to another person who will owner occupy, then the taxes on the property will still only rise a maximum of 3% for the next year.
From the research I’ve seen – there are many, many properties where the value of the property on which the owner is paying taxes is still significantly below the current “market value.” In these case, the taxes will still continue to climb 3% a year, even though the FMV is declining, because the taxable value remains below the FMV.
GreenNV
The Assessor is already showing the 15% reduction in land values on the web site. Look up your parcel and check out your proposed taxes for 2009-10. Note that the reduction only applies to the land value, not the value of the improvements (your house). In my case where my land and improvements are valued about the same, the reduction is closer to 8%. For the average subdivision house, the reduction will probably net out at less than 5%.
If you haven’t dealt with the Assessor’s office before, they absolutely rock! Call them with any questions you have on your tax bill – they are courteous, very helpful explaining their methodology, and have details on each parcel to back up their valuation. (IV residents may disagree, but you guys are getting away with murder up there.)
In 2001 when I bought my ranchero, my taxable value was about 86% of FMV. By 2007, it was about 50% of FMV, so my land value was bumped 93% for 2008. The proposed 2009-10 valuation including the 15% drop in land value will put me back at about 72% of FMV. Over the 7 tax years I’ve owned my home, my property taxes have increased 18%, which I consider more than fair. Without the abatement they would have risen 40% by 2008, and back to 29% for 2009-10.
Bottom line? If you bought my house tomorrow, you would be paying $33 a month more in property taxes than I am fully abated. Whoopie Twang.
DonC
Smarten — Very thoughtful of you to point this listing out to CL.
CommercialLender
Smarten,
Much thanks, but O.G. never made ANY sense to me. 1/17th with a week fixed each year and then you select several rotating weekends or weeks and call them and get on a list and pay a fee and lift your left hand while patting your right knee with your forehead and chanting in swahili … WTF? too friggin’ much to understand and worry about. Strings attached, HOA is way overpriced, the arrangement is not easy to understand, and the 1/17th units are way overpriced (still). Heck, I’m both in real estate and in finance and I couldn’t get past the first 2 minutes of their explanation of what time I actually own. This ‘model’ is just plain doomed, in my opinion, as the ‘build it they will come’ mentality is just gone for the long term.
Nevermind that 17x50K = $850K, or her asking of $88K = $1.5M valuation. I can buy outright a great Tahoe Donner place, a few years old, flat lot, 2 car, 2 level, etc etc and furnish it well for a lot less and have great amenities for an HOA of what, $155?/mo? Old Greenwood is doomed.
But, the idea of owning a 1/3 or 1/4th somewhere in Tahoe Donner or IV with friends or colleagues who are somewhat like minded (clean freaks, like to cook, have kids, etc.) seems(ed) to me like a way to enjoy the next 15-18 years with my kids while not having to constantly worry about an empty place 4 hours away.
I have not given up yet, but I think the advice you gave me a while back – wait and watch – is what I’m doing. I see nothing but downward spiral now in the ‘second home’ market in Tahoe, especially now with all the layoffs in the economy.
Again, though, you rock for pointing it out to me.
CommercialLender
Oh, and BTW, everyone, commercial property values are only just now starting to nose dive. Watch out below.
I see 2005, 06, 07 vintage value-added acquisition/rehab deals (multifamily, office, retail) dying on the vine b/c rents were vastly overstated in underwriting then, and the lenders are now loathe to extend these bridge loans due to lack of rental achievment and due to lack of any short term appetite in the market. And forget trying to refi these hi-levered loans in todays market (due to rents, values and underwriting standards, and the shear number of lenders in the market, or not in, I should say). They are destined for the lender’s REO portfolio, a process by which takes time. I am also seeing newly developed retail and office withering away with the same inevitability.
Basically, commercial is ~ 18 months behind single family. And, it will likely be 18 months behind in recovery. IMO, this will be a flat at best recovery.
And with that depressing news, I’m going to go jump off my 39 story office building now…
Move to Reno
Interesting discussion about fixing an over assessment of FMV in Nevada.
http://www.city-data.com/forum/las-vegas/480655-fixing-over-assessment.html
inclinejj
My sewer tax in the Bay Area is higher then my tax bill on most properties..
We pay the sewer bill on the property tax bill where some areas charge it on the water bill per month or every other month..
My building where my office is has an 650 dollar tax but the sewer tax is like 800 a year
I noticed my assesment that the county sent showed a lower assessed value But I didn’t really pay attention to the tax before I paid it..have to dig out the old bill
Perry
I was actually looking at houses on the view side of Diamond Ridge but Lakemont thought more of their homes than I did. There have been a few resales on these now and this tax issue is relevant for these new owners.
Check out 3242 Diamond Ridge. Lakemont sold this place to an unfortunate soul in 2006 for $883,794. These homes are now going for the high $400k’s. The taxes on this house are $8452 per year. The taxes alone would drive me away from these houses until this mess is fixed.
Guy Johnson
Various commenters above are correct that the 15% reduction applies only to all taxable *land* values. Here’s a link to the full announcement on the Washoe County Assessor’s site:
HOT! — WASHOE COUNTY BOARD OF EQUALIZATION APPROVES ASSESSOR’S RECOMMENDATION TO APPLY ADDITIONAL 15% REDUCTION TO TAXABLE LAND VALUES IN WASHOE COUNTY
…And, yes, “HOT!” was used in the announcement’s title.
Move to Reno
Perry, my understanding is that if you bought the house on the open market in the high 400’s your property taxes would go down because replacement cost has drop quite a bit from the peak days as have land values. This abatement stuff is for houses that were built pre-bubble.
TahoeTeal
The property tax situation here in Washoe County is ridiculous. Prior to the 3% limitation enacted a couple years ago my taxes were raised 24% in one year. I think it was 02-03, or 03-04. I know that back then we were only reassessed once every five years. That’s still 4.8%/year if you do the math. I don’t believe that’s sustainable for most people. Pretty soon you’re forced to sell due to the property tax burden. Now we’ve been rescued and are suppose to be happy with the 3% cap? I still believe the system needs a major overhaul. It just doesn’t make sense to pay the same taxes on a home that is now worth 30%-50% less than a few years ago. I don’t care what the replacement cost is. It seems more reasonable that FMV should prevail and be used as the basis for assessment of property taxes.