An evolving and imperfect system has increased property taxes for many commercial real estate owners.
If you own or manage real property in the District of Columbia and are wondering why your real estate tax bill has gone up in recent years, you are not alone. One common culprit is rising assessed value, but that may not be the main or only source of an increase.
A less obvious contributor may be a new, different, or incorrect tax rate. Since tax rates vary greatly depending on a property's use, staying diligent when it comes to your real estate's tax class and billed rate is critical.
The District of Columbia applies differing tax rates to residential, commercial, mixed-use, vacant and blighted properties. Why is this important? Because the classification can make a considerable difference in annual tax liability – even for two properties with identical assessment values.
For example, a multifamily complex assessed at $20 million incurs a tax liability of $170,000 per year while the same property, if designated as blighted, incurs an annual tax liability almost twelve times greater at $2 million. Therefore, the assessed value is just one piece of the puzzle.
Keeping a sharp eye on a property's tax bill for the accuracy of any tax rate changes is paramount. This requires knowledge of current rates, the taxpayers' legal obligations, and how to remedy or appeal any issues that arise.
New Rates for Commercial Property
Property owners in the District should be aware of a recent change to tax rates on commercial real estate. The Fiscal 2019 Budget Support Emergency Act increased rates for commercial properties starting with Tax Year 2019 bills.
Prior to the enactment of this legislation, the District taxed commercial properties with a blended rate of 1.65% for the first $3 million in assessed value and 1.85% for every dollar above $3 million. The new measure replaces the blended rate with a tiered system, taxing a commercial property at the rate corresponding to the level in which its assessed value falls. Those levels are:
Tier One, for properties assessed at $0 to $5 million, taxed entirely at 1.65%;
Tier Two, for properties assessed at $5 million to $10 million, taxed entirely at 1.77%; and
Tier Three, for properties assessed above $10 million, taxed entirely at 1.89%.
The residential tax rate for multifamily properties remained flat at 0.85%.
The District of Columbia Code requires that real property be classified and taxed based upon use. Therefore, if a property has multiple uses, taxing entities must apply tax rates proportionally to the square footage of each use. However, it is ownership's legal obligation to annually report the property's uses by filing a Declaration of Mixed-Use form. Owners of properties with both residential and commercial portions should be hypersensitive to this issue.
The District typically mails the Declaration of Mixed-Use form to property owners in May, and the response is due 30 days thereafter. If the District fails to send a form to an owner, it is the owner's responsibility to request one. Remember, the owner must recertify the mixed-use asset each year. Failure to declare a property as mixed-use may result in the entire property including the residential portion being taxed at the commercial tax rate (up to 1.89%).
Vacant & Blighted Designation
If you have ever opened a property tax bill and faced a staggering 5% or 10% tax rate, congratulations, your property was taxed at one of the District's highest real estate tax rates.
Each year the Department of Consumer and Regulatory Affairs (DCRA) and the Office of Tax and Revenue are charged with identifying and taxing vacant and blighted properties in the District. The D.C. Code defines vacant and blighted properties for this purpose, and there is a detailed process governing why and when DCRA may classify a property as vacant. Nonetheless, in each tax cycle DCRA wrongfully designates properties as vacant or blighted, so it is paramount that the taxpayer understands their appeal rights.
To successfully appeal a vacant property designation, an owner must comply with one of the specifically enumerated and highly technical exemptions. One such exemption applies if the property is actively undergoing renovation under a valid building permit. However, the taxpayer should consult with an attorney, as there may be other requirements to qualify for an exemption. An owner wishing to appeal this designation must file a Vacant Building Response form and provide all applicable supporting documentation to DCRA.
Moreover, an owner may appeal a property's blighted designation by demonstrating that the property is occupied or that it is not blighted. Since an appeal of a blighted designation requires a more detailed review of the condition of the property itself, photographic evidence must be used to supplement any documentation provided.
Fixing Erroneous Rates
When dealing with local government and statutory deadlines, time is not on the taxpayer's side. It is important that as soon as an error is identified, the property owner understands the next steps. In some situations, the D.C. code or official government correspondence will lay out the process precisely for the property owner, identifying the who, what, where, when, why and how's of appealing a property's tax designation. However, sometimes a taxpayer will receive a bill without explanation.
In both scenarios, it is best to consult with a local tax attorney. These professionals have experience dealing with these issues, as well as with the corresponding governmental entities. A knowledgeable counselor can be an invaluable resource to guide you through any tax issue.