Updated march 2022
Recapture Tax: The Exception To Nevada’s Tax Cap
Historically, property taxes were calculated by simply multiplying the taxable value of a parcel by the assessment rate and multiplying the resulting product by the tax rate. This simple approach provided a level of uniformity, but in a rising market the increase in a property owner’s taxes would mirror the increase in the value of the property owner’s parcel. A real estate market that continues to rise, year-after year, would cause taxes to escalate, squeezing those living on a fixed income. To address this problem, the Nevada Legislature passed a partial abatement from property tax which applies to all properties. This legislation is commonly referred to as the tax cap because it limits the amount taxes can increase, from one year to the next, to a fixed percentage. This ensures predictability and stability in the tax treatment of a parcel – unless the valuation of the parcel triggers the recapture tax imposed by NRS 361.4725.
The recapture tax is triggered when, during a three year period, the taxable value of a parcel declines by 15% or more followed by an increase in value of 15% or more. If the valuation of a parcel fits this roller-coaster pattern the resulting recapture tax can come as a surprise. The impact is illustrated by the following example which is based on the assessor’s valuation of an actual parcel.
In year 1 the parcel was assigned a taxable value of $1,234,800. In year 2 the taxable value dropped to $840,351 – a decline 32%. The tax in year 2 (based on an assessment rate of 35% and tax rate of 3%) would be $8,824.
In year 3 the value of the parcel increased to $1,430,800 – an increase of 70%. Despite the increase in value the tax cap limits the tax assessment to an increase of no more than $706 – 8% of the tax paid in year 2. However, the fluctuation in value would trigger the assessment of a recapture tax of $1,515 in year 3.
In this example the property owner would be assessed the 8% increase allowed by the tax cap and the 17% increase attributable to the recapture tax (although collection of the recapture tax would be spread over 3 years).
Property owners appreciate the predictability provided by the tax cap in a rising real estate market but are often unaware that a recapture tax might be assessed. No notice of the pending assessment is given; it just shows up on the tax bill. Consequently, for many the assessment comes as an unwelcome surprise.
The tax bills for tax year 2022-23 will be issued in July. Many of those bills are likely to include the assessment of a recapture tax because, following the outbreak of the coronavirus and the closure of businesses, the assessor assigned reduced values to many properties for tax year 2021-22. Then, after businesses reopened and the incidence of infection waned, the assessor increased the values for tax year 2022-23. This valuation pattern is likely to trigger the assessment of recapture tax for some properties.
It is always important to critically review the tax treatment of your property, but this year there will be one added factor to consider – the recapture tax. Our property tax attorneys know the critical legal and valuation factors that affect the tax treatment of property in Nevada and are prepared to assist property owners in evaluating and, when appropriate, challenging that tax treatment.
Paul D. Bancroft
American Property Tax Counsel (APTC)