Wednesday, December 16, 2015

Appealing My Tax Bill

Twice this year I have had conversations with the Pima County Assessor's office about the tax bills on two of my rentals. I am learning more about what they expect and how to file successful appeals.

The first time I went in with 28 pages of documentation to support my claim that the assessed value of one of my rentals was way too high relative to the assessed values of nearby rentals. The judge said she didn't have time to look at all that and denied my claim.

I had spent several hours preparing to demonstrate that my house wasn't worth the assessed value based on the gross rent multipliers and capitalization rates of nearby comparable rentals. She clearly had no idea what I was talking about, and told me my presentation was meaningless to her because I identified the comparable rentals in my analysis by street address, rather than parcel numbers.

The county appraiser gave me his spreadsheet showing the parcel numbers of the comparable properties he used in his analysis of my rental property's value. It was my job to look up the addresses on my own time, so I had no way to challenge his approach. His spreadsheet had many columns of numbers, with incomprehensible abbreviations in the column headers and no key to explain what it was all about.

Note to self: if I ever go to another assessment hearing, have a one page spreadsheet showing addresses and parcel numbers of the comparable properties, plus a map of the properties showing their proximity to my property. Anything else will be ignored. Forget trying to establish value based on return on investment. The judge has no interest in the only thing that an investor should consider when deciding what a property is worth.

I almost went to another hearing tomorrow, but thanks to a long phone conversation today with a very knowledgeable and helpful member of the county assessor appraisal staff, I got my questions answered and cancelled my hearing.

Here is what I learned today:

The full cash value (FCV) is reevaluated every year based on nearby sales of similar properties. A computer does the preliminary evaluation, and then the county appraiser looks at the parcels and discards outlier sale prices and sales that are not similar in age or condition to the subject property. The county appraiser who explained this to me used to be a real estate agent, and she said that when she sold houses, "everyone" thought FCV was 72% of market value. Many sellers have told me with confidence that FCV is 80% of market value. When she started working for Pima County, she was told it was no such thing. FCV is supposed to be market value, but it is usually a little less.

She said taxes are based on limited value, which can not be appealed. Only FCV can be appealed, but it's only loosely related to the limited value. The limited value can go up no more than 5% a year. If the FCV decreases, the limited value will probably decrease. At one time FCV and limited value were the same, but that has changed due to the annual reevaluation of FCV and the 5% annual limit on increase in limited value. 

If taxes are based on limited value, and a tax payer can not appeal the limited value, what is the point of appealing the FCV? The appraiser said there really isn't much point. 

To calculate property tax, first multiply limited value by assessment ratio, which is 10% for residential real estate. So if the 2016 limited value is $200,000, the assessed value is 10% of that, or $20,000. Then you have to multiple the assessed value by the primary tax rate (11.5%, for example) shown on your tax bill to get the primary tax ($2,300). The assessed value is also multiplied by the secondary tax rate (4.5%, or example) to get the secondary tax ($900). The primary tax and secondary tax are added together for the total property tax ($3,200). There are probably also override and bond rates to add to the tax bill.

The primary tax rate, secondary tax rate, bond rate and override rate vary by neighborhood and school district. And the secondary rate is higher for rentals than it is for owner-occupied houses. This is why I have to pay $2,219 in property tax, more than on any of my other houses, for my smallest rental, which is a simple 750 square foot, 70 year old house, located near the University Medical Center.

Termites: Spot Treatment or Whole House Termite Treatment?

One of my buyers is buying a house that has pretty extensive termite damage. The seller has reduced the price so my buyer can have the house treated for termites and repair the damage after close of escrow. 

My buyer wondered whether she could just spot treat the areas where the inspector found termite damage. Some damage is visible from the attic access, and it's not possible to see the whole attic because heat ducts block the way. It's safe to assume that more damage will be detected when the heat ducts are removed.

I told her she can not do a spot treatment instead of the whole house treatment. The termites will just go around the treated area. 

After the whole house is treated for termites by a licensed termite contract, it will have a one year warranty. If termites reappear within a year of the treatment, the company that did the treatment will spot treat. 

Because the termite infestation is so extensive, I told her to have the house inspected again six months after treatment, and definitely before the one year warranty expires. Inspections that do not involve the sale of a house do not need a report filed with the state, so the inspector will usually do the inspection for free. 

Some termite companies will do a cursory inspection when the house is under warranty, because they don't want to find termites that they will have to treat. I told my buyer she should not try to save a few dollars on treatment. She should just have it done by a company that I think will be thorough and do a serious inspection, even if it means they have to do some treatment under warranty.

If termites reappear within a year of a whole house treatment, it doesn't mean the treatment was done incorrectly. It just means that the termites have found a way into the house by a route that wasn't treated. In a house with room additions, there are several gaps in the slab where termites can get in. The termite company will keep focusing on the newly infested areas until they eliminate all the termites.
If the termites were attracted by a leaking faucet, roof, irrigation line, or rainwater that ponds next to the house, the termite problem will probably persist until the conditions conducive to termite infestation are remedied.

After the whole house is treated for termites, the termite damage must be repaired so that if/when new damage appears, it will be clear that it actually is new damage. When damage is found in the attic or a shed of one of my houses, I paint over any repaired areas, write the date of the treatment on the repair, and keep the treatment records. The State of Arizona only keeps termite treatment records for five years, so they are usually not helpful in documenting treatment.