Municipalities and school districts increasingly file lawsuits to increase property tax assessments.
As property owners increasingly participate in transactions across multiple states and countries, they could be shocked to find themselves defending against a lawsuit filed to increase their real estate taxes.
A minority of states allow the local real estate tax assessing body or school district to appeal a tax assessment, arguing that the property's value and resulting taxes should be higher. States where these types of appeals are allowed include Ohio, Pennsylvania and New Jersey. Property owners in those states should be aware that someone may be filing a lawsuit to increase their property taxes.
Method to the madness
Taxpayers cannot prevent a school district or assessing body from appealing a property tax assessment in states that allow them to do so. Property owners should be especially watchful in the following situations where it is more likely to occur:
Sales – In Ohio, if a recorded sales price is higher than the current assessment, it is almost guaranteed that the local school district will file a complaint to increase an assessment, particularly in large markets around urban areas.
School district attorneys routinely review recorded sales for comparison to the current assessment. Although recent legislative changes have increased assessors' ability to consider all relevant facts of a sale, a recorded sales price is still a formidable challenge to overcome.
In Pennsylvania, and particularly in Western Pennsylvania, sales are the most common trigger for an appeal to increase a tax assessment. In states where chasing sales price may run afoul of constitutional protections, the local taxing authority may wait until a few years after the sale closes before filing the appeal.
Mortgages – In response to lower sales prices and increased sales volume resulting from foreclosure or bankruptcy during the Great Recession, taxing bodies also file appeals to increase taxes based on recorded mortgages.
Similar to the tracking of recorded sales, attorneys for the taxing authority will review the amounts of recorded mortgages and compare them to the current assessment.
When the mortgages are secured by collateral that includes other assets in addition to the real estate, this practice can lead to inaccurate and inflated real estate tax assessments.
Other available filings – A recent case in Ohio shows the spread of this practice from recorded mortgages and deeds to Securities and Exchange Commission (SEC) filings.
The local school district filed an appeal to increase the assessment of an apartment in Athens from approximately $12.6 million to $48.98 million, based on an SEC filing by a mortgage lender.
The property owner's attorney has stated that the SEC filing includes the total value of the business purchased, which includes other assets in addition to the real estate.
The local county board of revision granted the revision at the first level of review and the case is currently on appeal.
Outside consultants – In Pennsylvania, taxing authorities filing complaints to increase assessments are on the rise, particularly in counties that have riot undergone a reassessment in some time, based on the recommendations of outside consultants.
These consultants contract with a particular taxing body, typically the school district, to review assessments and recommend appeals on properties they identify as under assessed.
Although this consultant activity seems most prevalent in the eastern part of the state, the regular practice of school districts filing appeals is spreading across Pennsylvania.
Meanwhile, in Ohio certain school districts have even begun to file complaints to increase values in cases that have previously been tried in court.
Because sales trigger so many of these cases, it is important to get pre-closing advice on the property tax consequences affecting your specific property. There may be measures the taxpayer can take in structuring the transaction to avoid or minimize an increase in taxes.
Be aware of the tax consequences of recorded and publicly available documents, including SEC filings, particularly with portfolio asset purchases across multiple states.
Filially, attorneys for the taxing body may use procedural tactics to fish for non-public documents that could help them argue that a property is under assessed. For example, school districts in Ohio have used the discovery process to subpoena financing appraisals from lenders.
Local expertise is key
Because real estate taxing schemes vary greatly, owners should consult local tax professionals to determine the best strategy to defend against an appeal that seeks to increase the property owner's taxes, or to minimize the potential that such an appeal will be filed in the first place.
Procedural, jurisdictional and evidentiary traps abound for those not well-versed in the local law.
For example, in Ohio, property taxes are levied and paid one year behind, meaning that taxes for the 2016 tax year are paid in calendar year 2017. Similarly, appeals to reduce or increase the tax assessment are filed one year behind.
If a taxpayer purchases a property and the sale closes on Dec. 31, 2016, for a recorded price that is higher than the current tax assessment, the school district will be aware of that sales price and can contest the 2016 assessment any time from Jan. 1 through March 2017.
If the school district appeals the assessment based on the sales price and is successful, the assessment will be increased to the sales price, effective at the beginning of the 2016 tax year.
That means the buyer could be on the hook for increased taxes for a period of time when he did not own the property.
Local taxing bodies have been filing appeals now more frequently to increase property tax assessments, attempting to generate revenue after property values and sales prices dropped during the economic downturn.
Even though the market has improved, these taxing authorities are unlikely to now abandon the practice.
Consult with professionals who have local experience to defend against these suits in order to maintain fair real estate assessments and taxes.