Property Tax Assessment

[MaryAnne Burrows]

We are trying to understand how assessments for property taxes may affect our deal when doing the BRRRR method.

We are buying a house for $50K, putting in $20K for rehab. Our ARV will be around $105K. We plan on refinancing $80K.

Currently the house is assessed at $46,400, with property taxes currently around $928 for the year (taxes are 2% for rental properties where we are currently investing).

How can we get a clear answer if our property taxes will go up next year after it shows a higher appraisal when we refinance?

[David M.]

@MaryAnne Burrows

Quick google search shows Indiana having an ad valorem tax which is how nj operates. Scanning through the below link, it seems IN is the same as NJ, unlike California which is a bit different.

https://www.in.gov/dlgf/2516.htm

Unless tour municipality does a mass re-assessment and sends people out to go into properties (with homeowners’ permission), the municipal assessor won’t know. The only other way for him/her to know would be if you filed permits and made the cost of the improvements very high for some reason.

Unless an assessor knows improvements were done, there is no good way for them to individually increase the assessment on your property. They may be mass adjusting the properties in the area, but the municipality/ neighborhood will move together proportionally. Read the link above about how tax rates are set. Most people don’t understand this. The site is a little long winded, but seems to well describe the system. In short, the town needs so much to run itself, ie its budget. The sum of all the assessments is called the ratables. The budget divided by the ratables is the necessary tax rate to raise the necessary funds. So, if the budget goes up, the flat tax rate goes up. Your proportional share of tax liability is based on the assessed value of your property. So for example, if ALL the properties assessed values doubled, that would just mean the tax rate would be halved. If your assessment doubles and nobody else changes, you’d pretty much be paying twice in taxes since the rate really won’t budge.

Now, the issue with california is they set the assessment of the property to the last sale price of the property and fix their tax rate. That’s why during the last crash in 2007-2008 timeframe, the State was declaring bankruptcy. Their tax rate was fixed, and has homes went into foreclosure and sold for declining values, their assessed values went down and the municipalities were collecting less revenue.

But in your case it doesn’t sound that way. Permits are the main way the town assessor knows something has changed. Not advising you do something wrong and skip permits, but remember usually the “cost” put down on the permit is for the “stuff” being permitted. In my case it’s not the additional bathroom, but the say 2 extra electrical circuits with 5 outlets and the additional plumbing (say three drains, etc). Well, the electric could be just “a few hundred dollars.” And so on... but the value of an additional bathroom is way more than that.

Hope this helps. Good luck