Tax Assessment Decrease

[Michael Workman]

I found a house being advertised as turnkey and still passing the 2% rule. They even toted a abnormally small property tax for the area. However when I looked it up the property tax has been cut in half In just the last year because the tax assessment declined 50%. What does this mean? Why would the investor be trying to get rid of a lucrative investment that just happens to coincide with the year the assessment declined substantially?

[Jason D.]

@Michael Workman maybe they claimed a homestead exemption? I would run the numbers assuming the higher tax rate

[Pat L.]

We 'once' had similar but smaller reduction. The home we bought was being renovated for my daughter as her principal residence. The city had an incentive for those improving their homes. Unlike most who nail you with higher assessments for any observable improvement. The assessor dropped the assessment from $159,900 to $120,000.

The assessment for school taxes did increase slowly (to $135,000) over the 8 years that she owned it but the savings up here in NY were impressive.

[Andy Webb]

@Michael Workman - perhaps they bought it off-market last year at a price substantially below the tax value and had the tax value lowered to match the purchase price?  This saves them taxes during the period the property is held, at least initially.  And gives them an extra bit of marketing ("low taxes!") to sell their turnkey property.

Here in Texas you can protest your tax value annually as a regular process during a set window, and you can also protest if you buy a property outside of that window if your purchase price was well below the value on the tax rolls.  

Example: we bought one this year for $80k; it was on the tax rolls at around $120k.  We showed the appraisal district our settlement docs and they lowered the value by $40k on the tax rolls. Benefit to me: I cash flow more on my new rental.  Texas is a non-disclosure state by the way.

Here is where I would be careful: in our area of late the lower value usually only sticks for a year or two, until the appraisal district reevaluates...so in 2020 I can expect my value to bounce, taxes to increase and my cash flow to decline.

You did not mention the state you are looking at, but in your situation I would check to see how the appraisal district normally behaves (e.g. can you expect the value to jump again right after you buy it?). Run your cash flow analysis with the value before it declined 50% to see if it still makes sense as an investment.  And look to see how the values of neighboring properties are trending...up or down.

Andy