Rehabs and property taxes?

[Ashley England]

How are property taxes calculated?

I understand it’s partially determined by the value of the home. When turning rehabs into rentals, how can I plan for what the property taxes will be after the rehab is complete?

If you take the time to respond to this post, I appreciate you!

[David M.]

@Ashley England

Generally, assessors are "informed" of an improvement to a property through permits.  When you pull a permit, you need to include the value of the improvement.  Its usually much less than the amount that you are paying for the change.  So, if you are doing a remodel of say updated kitchen and bathrooms (new cabinets, new countertops, new fixtures), new floors, and fresh paint, none of that requires a permit.  You haven't changed any of the plumbing, electrical, etc.

Most States use the ad valorem system.  As you said, the assessor determines the assessed value by the value of the property.  They generally should be adjusting the property values within their municipality yearly (usually an overall percentage) and periodiacally having a reassessment done.  Usually, both aren't done because the former requires the assessor to figure out an average change in property values and the latter requires hiring a licensed firm to do the reassessment to individually update the property assessments.

So, you asked about the taxes...  The sum of all the assessed values is the ratables.  The tax rate is determined by the municipalities yearly budget amount divided by the ratables.  Basically, the tax rate floats to be what is required to generate enough revenue to cover the yearly budget.  So, if you were to double the assessed values of all the properties, the tax rate would just halve.  That's why the key is to get your property to be assessed less so that you pay proportionally less.

That being said, some States don't float their rates because they also have another "twist."  California is a big example, and I believe its lots of the West and Southwest states.  They set the assessed value as the last sale price.  Meanwhile, the tax rate is fixed.  This is one reason why during the real estate crash of 2007-2008 they went bankrupt.  Since property sales values were falling, the assessed values fell.  Since their property tax rate was fixed, they were getting less and less revenue.

I see this a lot when I get out of State clients who are fixated on the tax rate and sales price.  In NJ we don't have that feature where the sales price sets the assessed value.  So, neither of these factors really matter.

In any case, unless you are doing major changes, your change in property taxes will be no different than the yearly fluctuation / change.  Otherwise, the assessed value will be adjusted by the amount you/your contractor reports on the permit.

I hope this helps.  Good luck.