New York state property tax assessments and the homestead option.
Because property taxes make up the largest portion of state revenues and a good portion of a homeowner's income, state and local tax professionals must be well versed in this area. Furthermore, most Big Four and many other accounting firms no longer have property tax practices, so property owners typically seek guidance from non-CPAs who are typically paid based upon a contingent fee.
Reassessment of Property
In the state tax landscape, property taxes have become more relevant as jurisdictions look to shift the property tax burden to various classes of property owners and increase revenues on a larger tax base. Many New York towns are using the current economic environment to initiate a reassessment of property--that is, a process whereby all property within a jurisdiction undergoes a formal revaluation process. In some New York towns, reassessment has not been completed for decades. New York is one of the few states with no formal legal requirement for the reassessment of property on a regular basis. Instead, local elected officials determine the frequency of reassessments, which are not undertaken regularly.
Furthermore, New York State has unique property tax provisions; if property owners are not aware of these provisions and if they are implemented during reassessment, it could significantly impact property owners by shifting a disproportionate share of the tax burden to one or more classifications of property. (Note that New York City and Nassau County have specific guidelines for assessment, which have not been addressed in this article.)
The Basics of Real Property Tax Calculation
Real property tax is due to a locality based upon the value of the property. In New York State, property taxes are allocated to the county, town, village, and school, along with special taxing jurisdictions (e.g., library, ambulance, fire, light, refuse and sewer, garbage). Each local property tax jurisdiction (e.g., school, village, town) prepares a budget that is voted on for approval. If approved, the budget is reduced for any revenues that the locality expects. The remaining balance is the tax levy--that is, the amount of taxes needed to be collected from the property owners. The tax levy is the numerator in determining the property tax rate (also known as "millage rate" or "mill rate") for the computation of the property owners' tax.
Each property has an assessed value that represents the market value of the real estate; however, New York State does not require assessments at full market value. Pursuant to New York's Real Property Tax Law (RPTL) section 305(2), each assessing unit (local jurisdiction) is assessed a uniform percentage of value, called the level of assessment (LOA); consequently, the locality can choose to assess property at a portion of the market value as long as all property is assessed at the same uniform percentage of value. The LOA is determined each year by the assessor and can be found on the assessment rolls and tax bills.
The total assessed value is equal to the assessed value of all properties within a jurisdiction, which is based upon the LOA. The total assessed value acts as the denominator in the fraction used to determine the tax rate. The mill rate is the rate applied to each $1,000 of the property's taxable assessed value; its calculation is shown in Exhibit 1. In New York State, unless the homestead option has been passed by the locality, the mill rate for all classifications of properties (commercial, residential) is the same.
Each year, property tax may vary because it depends upon two factors: 1) the local budget or tax levy, which is likely to increase each year, and 2) the total assessed value of the community, which is the responsibility of the local tax assessor. The total assessed value of the community can change based upon the following factors:
* Annual adjustments made to all property based upon current market conditions by the tax assessor; the tax assessor typically uses computer-assisted mass appraisal techniques to analyze sales and estimate values for many properties (http://www.tax. ny.gov/pubs_and_bulls/orpts/assessjo.htm)
* New construction, which increases the number of parcels and thus the total assessed value
* Property tax petitions, which generally decrease assessed value. (Homeowners typically petition the jurisdiction for a reduction in assessed value.)
Classification of property. Property is classified into various categories that describe what type of property it is. This classification also determines the valuation method used to ascertain the assessed value of the property. Property classifications include agricultural, residential, commercial, vacant, and further subdivisions thereof.
Determination of assessed value. Assessed value is used by a locality to determine a property owner's share of taxes. New York State has determined that the assessed value should be equivalent to the property's market value, as determined by one of the following three methodologies (http://www.tax.ny.gov/pit/property/ leam/howassess.htm):
* Market approach. Also referred to as the sales approach, the market approach typically uses comparables of similar property in order to estimate value. This approach is typically used for residential property, vacant property, and farmland.
* Cost approach. This approach determines the cost to replace the property, subject to modifications, and is typically used for industrial and utility properties.
* Income approach. The third approach estimates the value of property based upon the net income that the property generates. This approach is typically used for commercial property, such as an apartment building.
Market value (which is separate and distinct from the market approach) is defined as the price that a willing buyer and seller agree to in an open market. Each of the methodologies above is an appropriate method of valuing property. Statutorily different methods are required to be utilized for different classifications of properties. The following approaches are utilized to determine market value for various classifications of property under New York law:
* Residential single-family homes: market approach
* Proposed and new construction, special-purpose properties (e.g., religious facilities, museums, schools), and properties with limited sales or income information: cost approach
* Condominiums: income approach
* Co-ops: income approach
* Commercial property: income approach.
Although there are guidelines with regard to the determination of market value, due to latitude provided by New York State law, a property owner may find that the assessed values for county, town, and village might be different.
County equalization rate. Because not all towns compute taxes based upon the same uniform percentage, the tax base of localities needs to be adjusted to the full market value method so that county taxes can be applied equally to all property owners. Thus, an equalization rate is computed and applied to the assessed value of the town in order to determine the full market value to be used for county tax purposes.
Other taxes. Local villages have their own authority to assess and collect property taxes. They may make adjustments to the assessed values that are different from the other adjustments; consequently, the assessed value of a town and a village may be different. The special taxing jurisdictions typically utilize the town's assessed value. Furthermore, there may be a different assessed value for school tax purposes.
Many states permit a reduction in school taxes for residents of a community, typically a reduction in the assessed value for property owners if the owners occupy the property and use it as their primary residence. This reduction is typically referred to as "homestead" in most states. In New York, however, the reduction in tax for primary residents is referred to as STAR (State Tax Relief Program). There are two types of STAR exemptions:
* Basic STAR. This is available for owner-occupied, primary residences, where the resident owner and spouse have an income less than $500,000. ft exempts the first $30,000 of a home's full value from school taxes.
* Enhanced STAR. This provides an increased benefit for the primary residences of senior citizens (65 and older) with qualifying incomes, ft exempts the first $63,300 of a home's full value from school taxes (as of 2013/14 school tax bills, up from $62,200 in 2012/13; http://www .tax.ny.gov/pit/property/star/index.htm).
Beginning in 2014, property owners will have to register for STAR. Taxpayers will not have to re-register each year, but the state will monitor a property owner's eligibility for the exemption going forward.
The Reassessment Process in New York
New York State is encouraging localities to reassess property based upon full market value. This means that the assessed value will not be reduced by a uniform percentage and that tax will be due on the full assessed value. In an effort to encourage localities to reassess, especially those that have not assessed in decades, New York is offering them aid to offset the costs of conducting such an undertaking. To obtain the state aid, the localities have to agree to conduct ongoing reassessments on a regular schedule. If the reassessment plan is not adhered to and the town falls outside the scope of reassessment, the town might be required to pay back the state aid (RPTL section 1573). The Department of Taxation and Finance's "Guidelines for Cyclical Reassessment" provides more information, and its "Guidelines for Non-reappraisal Reassessments" explains reassessment and reappraisal as follows:
[Reassessment means] an assessing unit may revise its assessments as provided for in Real Property Tax Law (RPTL) to maintain uniformity and/or level of assessment, using means other than a lull reappraisal ... in those years in which a full reappraisal is not conducted. ...
Reappraisal means developing and reviewing a new determination of market value for each parcel, based upon current data, by the appropriate use of one or more of the three accepted approaches to value (cost, market, or income).
Under this program, a formal reappraisal process would need to be undertaken to value the property at fair market value. In years when a formal reappraisal is not conducted, the value of the property may be adjusted with an optional reassessment. It is important to note that the reassessment process is separate and distinct for towns and villages. Villages have the authority to conduct their own reassessment or use the results of the town's reassessment; in the former case, a property owner could pay tax on two very different assessed values.
The Homestead Option
In some states, the residential and commercial property tax rates differ, often referred to as split taxing jurisdictions, whereby commercial property owners pay a different (often higher) mill rate than that of a residential property owner. In New York State, this split jurisdiction is known as the homestead option; however, this denotation can be confusing and misconstrued by property owners because the term "homestead option" has a very different meaning in other states.
When undertaking a reassessment project, the jurisdiction has the option to implement homestead, which permits it to create two classifications of property: homestead for residential property owners and nonhomestead for all other property owners. The two different classifications of property types will be subject to two different mill rates. The homestead option can only be implemented during a jurisdiction's reassessment process and must be voted on and passed by the town board. (For frequently asked questions about the homestead option, see http://www.tax.ny.gov/ pdf/publications/orpts/homested.pdf.)
Changes in assessed values. Under the homestead option, property will be reclassified as follows:
* Properties that are covered by homestead, including one-, two-, and three-family residential homes; constructed condominiums; and vacant land parcels not larger than 10 acres in zones that restrict residential use to one-, two-, or three-family residential homes would be considered the residential classification of property.
* All other property, including converted condominiums and cooperative apartments, would be classified as commercial property.
If the homestead option is implemented, the immediate impact will be on the assessed values of condominium complexes that were built as condominiums (i.e., rather than condominiums converted from rental units). These units are often referred to as constructed units. Currently, the assessed value on constructed units is determined based upon an income approach under New York RPP section 339-y(1)(b). Under the homestead option, the constructed units will be reassessed based upon a sales comparable or market approach [New York RPP section 339-y(1)(d)].
Pursuant to New York State law, the assessed value of co-ops and converted condominiums (condominiums that were previously rental units) is based upon the income method and cannot be changed statutorily. (These co-op and converted condominium units are often referred to as converted units.) The assessed value for these units of "real property owned or leased by a cooperative corporation or on a condominium basis shall be assessed for purposes of this chapter at a sum not exceeding the assessment which would be placed upon such parcel were the parcel not owned or leased by a cooperative corporation or on a condominium basis" [RPTL section 581(1)(a)].
Most would assume a converted unit and constructed unit to be in the same classification of property. But under the homestead option, converted units and constructed units are taxed using a different assessment methodology. The determination of assessed values for all other classifications of property will not change under the homestead option--it will only change for that of constructed units.
A recent study by a Westchester County town undergoing reassessment and deciding whether to implement the homestead option revealed that only 650 of the town's units would have been impacted. The estimated total tax increase from town, county, school, and special taxing jurisdictions for these constructed units would have been 250%, whereas the rest of the community would have had an estimated total tax increase of 6%. Thus, under the homestead option, the immediate result would be for a small class of property owners to bear a disproportionate amount of the tax increase.
Split rates. An important implication is the longer term impact of the split tax rates. Under the homestead option, two rates will be determined: one for residential and one for commercial (including co-ops, converted condominiums, and commercial properties). The methodology used to calculate the split rates is as follows:
* The total assessed value of all properties within the jurisdiction is determined.
* Based upon the assessed value, a percentage of residential and commercial property is determined [e.g., 60% homestead (residential) and 40% nonhomestead (commercial)].
* The tax levy will be allocated to the property classification based upon the homestead/nonhomestead split. In this scenario, the residential class would pay 60% of the taxes and the commercial class would pay 40% of the taxes.
The town has the option to freeze this split, so that even if there were a change in the percentage split between residential and commercial, taxes would still be allocated based upon the initial breakdown.
For example, in 1988, the city of Kingston in Ulster County adopted the homestead option. It taxes property owners based upon 100% of the assessed value. Currently, the mill rate for commercial property owners is 1.5 times that of residential property owners. Commercial property owners are paying 46% of the tax levy, even though they only account for 31% of the taxable assessed values (Paul Kirby, "Kingston Study Will Examine Effects of City's Dual Tax Rate," Daily Freeman, Jun. 24, 2013).
In another example, Pelham (in Westchester County) has also adopted the homestead option and assesses property based upon 100% of the assessed value (http://www.townolpelham.com/community_ demographicshtm). The rates were not available on the town's website, but they were computed based upon information available via the village website, utilizing assessed values and taxes paid per sample property. Exhibit 2 summarizes the difference between homestead and nonhomestead tax rates in this case. Based upon this analysis, a nonhomestead taxpayer's mill rate is 27.59% higher than that of a residential homeowner.
Villages have the option to choose the homestead option only if the town has implemented it. Therefore, the tax base upon which taxes are levied might be different for the town and village.
Impact of the Homestead Option
Based upon the author's personal experience and conversations with representatives and consultants hired to assist a town with its reassessment, it was represented that the only impact of homestead was on constructed condos and the valuation methodology for them; no other property owners were impacted. This fact was repeated in various town-meetings, presentations, and communications, along with taxpayer phone calls to the town assessor's office. The two biggest impacts of implementing the homestead option are reviewed below; however, town representatives and consultants only communicated the first, which might lead one to conclude that they were either uninformed or were misrepresenting the facts. (Note that neither of these affects the owner of a single-family home and would likely reduce such an owner's taxes.)
Why a condo is not a single-family home. The crux of the issue surrounding New York State's homestead option is that the assessed values of constructed condos would be changed to the comparable sales method, by which the assessed value of single-family homeowners is determined.
Converted condominiums, co-ops, and commercial property assessments would remain based upon the income approach. Pursuant to RPTL section 581(a), the assessed values of condominiums and coops shall not exceed the value of the parcel if it had not been owned by co-op or condominium. As such, state law confirms that the assessed value should be looked upon as the total value of the property located on the land and not as the sum of the individual units of such property. Thus, the valuation method used to determine assessed values in these instances is the income approach.
Furthermore, under RPP Article 9 of the Condominium Act, a condominium is a legal issue, rather than a property issue, and condominium owners should not be penalized based upon their ownership structure. Treating constructed condominiums differently from co-ops and converted condominiums would cause a huge disparity among property owners within the same classification of property (i.e., apartments).
An argument is often made that condos are the same as single-family homes; however, this is not the case. A condominium--
* is a separate legal entity with its own federal identification number,
* can borrow money,
* can be sued,
* can file tax returns,
* can have audited financial statements,
* can have employees,
* can be issued an insurance policy,
* has an unlimited life, and
* has a statutorily different grievance process (whereby a property owner can contest an assessment).
A property owner should not be penalized because of the form of ownership. The author hopes that this article will act as a guide so that constructed condominium owners do not have to address this issue in the future.
Two rate classes. Under the homestead option, property classes are bifurcated. Of concern is the manipulation in future years and the impact of this bifurcation on property tax rates. As previously illustrated, commercial property owners (including co-ops and converted units under homestead) may experience an estimated 25% to 50% increase in the mill rate over residential property. Due to the complexities associated with property taxes and the lack of transparency in the property tax process, many taxpayers fear that creating a split tax system will provide for manipulation of the tax rates. Basic economic principles illustrate the impact of a split taxing jurisdiction. If commercial tax rates are higher, rents within a jurisdiction will go up, along with the prices charged by local business.
Kingston, N.Y., recently conducted a study to determine the effects of Kingston's dual property tax formula, which taxes commercial and residential properties at different rates. This author is not convinced by the findings, as detailed in "Instead of Homestead? Study Looks at Impact of Dual Tax Rate," which state that "Kingston's dual tax system has found that varying tax rates on commercial and residential properties likely have some negative impact on economic development in the city, but not ruinous consequences" (http://www.kingstonx.com/2014/02/17/instead-of-homestead-studylooks-at-impacts-of-dual-tax-rate/). This author believes that any negative impact on economic development is ruinous. Furthermore, if property taxes were not a consideration in bringing business to a locality, why would localities offer the many property tax abatements that they do? It should be noted that this study focused on businesses, rather than the impact of reclassifying co-ops and condominiums as commercial units subject to the commercial tax rate.
How CPAs Can Help
The following are ways that CPAs can assist taxpayers with their property taxes:
* Review property tax information when preparing tax returns. Make note of any discrepancies between the property and the town's records (e.g., classification of property). (During the reassessment process that this author was involved in, several homeowners noted discrepancies between the town's records and the property.)
* Alert property owners (especially business owners) of the potential implications of the reassessment process; this will aid in building a solid relationship with clients during this process.
* Help taxpayers understand the property tax implications during the home buying process.
* Keep track of the reassessment process. Once the jurisdiction has undergone a reassessment, it will need to undertake this process on an ongoing and scheduled basis if state funds were granted during the initial reassessment.
For this author, the most enlightening part of the reassessment process was learning how antiquated the administration of the property tax system was in her town. Based upon reports prepared by an outside consultant, the property tax system was monitored by a system of manual index cards, without the use of computer technology to assist with the assessment process. Misinformation was prevalent on these property tax cards and was provided to residents during phone calls to the town and village with questions about the reassessment and grievance processes.
Upon review of several town and village websites, it is apparent that there is valuable information and a good bit of transparency with regard to the annual budgeting process and the monitoring of these budgets (some towns are better than others). What is less transparent is the methodology and assumptions used in updating the assessments from year to year. One recommendation for localities would be to provide information about how these assessed values have been adjusted from year to year. This is especially important because property owners bear the burden to prove that an assessment is not appropriate, which can be difficult if the property owners do not understand the methodology used. Accountants are best prepared to analyze a situation when there is transparency into how the values have been computed.
The assessment process is further complicated when a taxpayer's property resides within both a village and a town because the property can be subject to two different assessors who have the ability to assess the property independently; this often results in two different assessed values on the same property. Therefore, the burden rests on the property owner to challenge the assessment within two jurisdictions. This is costly in time and fees if outside consultants are involved; moreover, the grievance process for the town and village is only available to property owners at certain times of the year, which can differ for both jurisdictions. A best practice would be for the jurisdictions to share such information about grievances or to centralize the assessment process. This could help reduce redundant services within a town and village and help streamline the grievance process for property owners.
Currently, there is a proposed bill in the New York State Assembly (A06268) that would require the market-based approach for all condominiums or co-ops converted or constructed after January 1, 2016. The legislature should consider the impact of such a change in the law--it would create two classifications of co-ops and condominiums, along with the administrative challenges of administering such differences within the same classification of property. If this bill were to pass, current condominium and co-op owners will need to become familiar with the new law in order to ensure that their assessed values are property computed.
Alison J. Iavarone, CPA (N.Y.), currently works for the Delaware Department of State, Wilmington, Del. The author belonged to an affected classification of property owners during her town's recent reassessment process, which led to her interest in the subject.
EXHIBIT 1 Calculation of the Mill Rate Tax Levy / Total Assessed Value x 1,000 = Mill Rate Sample calculation: Tax Levy 3,000,000 Total Assessed Value 60,000,000 (reduced by any uniform percentage) Tax Levy/Total Assessed Value 0.05 Times 1,000 Mill Rate 50 Sample Tax on Property with Assessed 500,000 / 1000 x 50 = 25,000 Value of $500,000 EXHIBIT 2 The Difference between Homestead and Nonhomestead Tax Rates Nonhomestead Homestead Difference Percentage County 3.5485 3.5485 0 0% Solid Waste 0.3463 0.3463 0 0% School 24.592 18.3035 6.2885 0.343568% Sewer 0.742 0.742 0 0% Town 0.7024 0.5252 0.1772 0.337395% Village 9.5931 7.5111 2.0820 0.277190% Total 39.5243 30.9766 8.5477 0.275941%
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|Title Annotation:||Taxation: state & local taxation|
|Author:||Iavarone, Alison J.|
|Publication:||The CPA Journal|
|Date:||Apr 1, 2014|
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