The property tax trigger
When it comes time to sell your investment property, any renovations you completed with a building permit will always trigger an increase in property value – and taxes. And your potential buyer will want to know how much more those taxes will be since you did the renovations.
The tax raising process
So let’s review the process by which taxes will be raised. Remember, you are helping to improve the overall quality of the community – and the community gets to share in this improvement as well – by increasing taxes on the increased value of the property.
When you obtain a building permit for any house renovation or addition, your town assessor will be notified by the building department. Assessors will want to see the work that’s being done, and will make a determination as to how much value is being added to your investment property.
After the town assessor determines the value added in any improvement to a house, he then must “equalize” the assessment value. Basically, this means he has to re-align the value relative to other neighboring communities within your state.
As an example, some communities will have equalization ratios that run about 20% of the real market value of the work that was done. (In a truly simplified world, all homes would be assessed at 100% of their market value, and no equalization ratios would need to be employed – but this is a rarity.) In this example, with the equalization ratio of 20% of real market value, a newly added deck that adds $10,000 of value to a property will be assessed at roughly $2,000. And if taxes were running, as an example, about $100 per $1,000 of assessed valuation, that $2,000 increase in assessed value would add roughly $200 to the annual property taxes on the property.
Construction cost is irrelevant
It’s very important to note that your exact cost for building that deck is not a salient point in determining your increase in assessment. Rather, the assessor only looks at the real market value as the base determining factor.
Since assessors must be equitable, the assessor will treat two identical decks as equal – regardless if one was built by a contractor at a cost of $10,000, while the other was erected by your brother-in-law for half that amount!
The assessor will always look at how much value that addition is adding to your property, and he’ll always strive to assess equally.
Renovations like decks, extra rooms and baths are all relatively simple to determine valuation, since the assessor can use special valuation tables based on these basic types of house improvements. Square footage measurements are taken, and multiplied by a set amount per square foot for similar style homes. In essence, these types of renovations are easy to quantify as to value added.
House alterations
What makes an assessor’s job harder however, are more subjective alterations to a house. For example, a total kitchen remodeling job is much more difficult to assess.
In those cases, it’s a real judgment call on the increase in value. Decks, garages and square foot increases are more tangible and easier to assess. When in doubt, the assessor will refer to the building permit to see if the dollar amount of the work to be done seems reasonable.
If not, your assessor may adjust the added value accordingly. Most assessors would agree that assessing alterations is not an exact science, but assessments are equitable.
photos courtesy of activerain.com, exomatiakaivlepo.blogspot.com, westmainworldchangers.com
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