GUEST SUBMISSION: As people around the globe prepare to ring in the new year, in the world of property ownership you’re likely getting ready to receive your assessment, and if you’re not, you should be.

When the first week of January comes around, property owners will receive their assessments based on the previous year, and this is where the work begins. There often is a misnomer that a glance at your assessment in January will suffice, given that taxes will not be due until July.

The bottom line is: if you need to appeal your assessment, it must be done by January 31.

Are you familiar with all the factors involved in evaluating and assessing your property? And if you disagree with your assessment, do you know how to appeal it before the end of January? 

There are several misconceptions that can complicate the assessment review process. Based on our decades of experience in the industry, we’ve identified the top five misconceptions that property owners often encounter. Evaluating these elements now could significantly impact your tax obligations this year and next. 

Defining terms

Before we dive into the key misconceptions, understanding the difference between a tax assessment and an appraisal is helpful. They are both methods for determining a property’s value but serve different purposes. 

A tax assessment is primarily used to determine the value of a property for tax purposes, whereas an appraisal is a professional evaluation of a property’s value, often conducted to determine the options tied to selling, buying, portfolio requirements, or estate planning.

With these definitions in mind, let’s discuss the top five misconceptions when looking at an assessment to determine if an appeal is a smart route to explore. 

Misconception 1: Market Value vs. Equity 

While both are important, market value and equity have separate definitions and roles in property valuation. 

Market value is the estimated price a property would sell for on the open market under typical conditions, which reflects the current market and comparable sales. This can also be referred to as your “appraised value.” Assessors use market value as a basis for determining a property tax assessment and how much tax a property owner might owe. 

Equity, on the other hand, pertains to fairness. In other words, how is my property assessed relative to the competitive set? It may be the case that the assessor generally values properties at, say, 75 per cent of what they sell for. On this basis, the equitable value will be less than the market value.

Understanding both of these concepts is critical as they can influence financial, short-, and long-term planning with your property, as well as investment strategies that go beyond this fiscal year.

Misconception 2: Fee Simple vs. Leased Fee

In property tax assessments, the terms “fee simple” and “leased fee” refer to different interests in real estate, and they can influence how properties are valued and taxed. Both can impact how much tax the owner is liable for. 

Fee simple is the most complete form of ownership, where the owner has control over the property and can choose to use, lease, sell or develop the land around it as they see fit. Properties assessed under fee simple are typically valued based on their market value. These properties are usually assessed using comparable sales or income approaches (based upon market rent and not contractual rent).

Leased fee refers to ownership of the property relative to a lease agreement. In these instances, the owner receives income in the form of rent from a tenant who has rights to use the property based on the lease agreement. Properties under leased fee may be valued under the terms of the lease and the income generated from the lease. If there are tenants in place, an appraisal is based upon the leased fee interest. 

Understanding the distinction between these two is crucial for property owners and investors to navigate assessments accurately. 

Misconception 3: The Beast Called Speculation

Speculation can significantly impact property tax assessments in a variety of ways.

For instance, if an investor buys a property with the expectation the value will rise, it can then drive up prices in the neighborhood, leading to an increase in property values. Speculative buying can also create volatile market conditions, resulting in sharp increases in property values for a short period of time.

This ultimately can lead to reassessments that reflect these inflated values. 

Additional elements that come into play because of speculation include tax burden on residents as property values increase, policy response with higher tax rates on investment properties, and supply and demand reducing available properties for standard buyers.

Speculation is a prickly element to assessments, and it must be accounted for carefully. This is often an element that leads property owners to consider assistance from a tax firm that would have the ability to inform an appeal.

Misconception 4: Value vs. Classification

Once you receive a value based on your market or equity value, your property is put into a class.

Classifications can range from residential, utilities, heavy-industry, light-industry, business, forestry and more. Each of these classifications carries a different tax rate, and having the expertise to determine which tax class you qualify for will have an impact on your tax level. 

Misconception 5: Know Your Exemptions 

Finally, some properties can be partially or completely exempt from taxes.

Before you get ahead of yourself, the list of what qualifies a property as exempt or partially exempt from taxes is specific. This can be seen, for instance, with properties that are places of public worship. 

The legislation and case law behind exemptions are intricate and vast; working with professionals who know and understand the specifics behind exemptions will be important as you review your assessments.

You Know the Misconceptions – Now What?

Knowing the misconceptions tied to assessments is one thing; understanding each one and the nuanced details behind them is another.

To support property owners as they navigate the weeds of assessments, tax professionals who have spent their careers studying and understanding these elements can develop preemptive tax strategies. 

The world of assessments and tax is complex. The more informed you can be with experts at the helm, the better off your investments and your future will be.