How can falling home values = rising property taxes?

Since property tax season has rolled around here in the Seattle area again, I thought it might be a good time to demystify one aspect of property taxes that has often confused home owners during this housing bust.

If you’re like many local home owners, the county’s assessment of your home has probably dropped around twenty percent over the last few years, but your property tax bill has continued to rise.

So what gives? If the value of your home is falling, how can your property taxes still be going up?

One factor that might cause your property tax bill to go up regardless of the value of your house is that Seattle area voters are prone to constantly passing new levees for things like schools, libraries, and low income housing. These are usually voter-approved measures that tack on an extra few cents per thousand dollars of assessed value, and adding a handful of these to your bill could easily offset whatever decrease may have seen in your assessment.

However, even without additional property tax levees, it is likely that your taxes may still be increasing, despite having a home that is worth less every year. The easiest way to understand how this is possible is to consider a simplified scenario.

Let’s say you live in the imaginary Emerald County, which contains only two houses. You and your neighbors—Hunter and Addison Taite—have identical homes that were built at the same time on the same size lot, with all the exact same upgrades.

In 2009, Emerald County collected $5,000 in property taxes. Since both your homes were assessed at the exact same value of $500,000, that bill was split right down the middle between you and the Taites, $2,500 each.

Now you and the Taites have just gotten your bill for 2010’s taxes, and you both find that although Emerald County’s assessed value of your home has dropped to $480,000, your bill has gone up to $2,525.

This is because your home’s assessment does not directly determine the amount of taxes you pay. Instead, it only determines how much of the county’s total property tax collection you are responsible for. Additionally, Washington State law allows municipalities to increase their total property tax collection by a maximum of one percent each year.

Property Taxes in Emerald County

In the example above, your share of Emerald County’s total tax collection in 2009 was 50%, so you paid 50% of $5,000. In 2010, Emerald County boosted their total property collected by the maximum amount allowed by the state, upping it 1% to $5,050. Since both your house and the Taites house fell in value, you each still owe 50% of that total, so you each saw a 1% increase in your bill.

Obviously the reality of counties with hundreds of thousands of homes is much more complicated, but hopefully this gives you the basic picture. The take-home point to remember here is that your home’s assessment determines your share of the total tax bill, which is essentially guaranteed to rise about one percent per year.

Therefore, if all the homes in your county (or city, or school district, etc.) are falling in value at roughly the same rate, then your tax bill will continue to go up. If your home is falling in value faster than most in the county, your tax bill might go down, but if it is falling in value slower than most other homes, you might see an increase of even more than one percent.

Stay tuned later this week for an additional look at property taxes, including a closer look at assessments. Next time I promise to bring more statistics, charts, and graphs.

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

37 comments:

  1. 1
    TheHulk says:

    Just curious about this twist to your tale…

    In your imaginary emerald county, the 2 houses were assessed for 500K each. Assume this year one of them went foreclosure. Does the bank continue to pay property taxes at the same rate as before? Or do they get a “discount” since the house was repossessed and hence the other property owner now has to actually pay more in taxes?

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  2. 2
    The Tim says:

    RE: TheHulk @ 1 – I don’t know the answer to that for sure, but if we assume that the foreclosed home is still in the same condition as the one that is owner-occupied, it would make sense for both their assessed values to remain the same as each other. And as far as I know, banks have to pay property taxes just like an owner-occupant does. I don’t think they get any special discount.

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  3. 3
    Magnolia44 says:

    My house last year had assesment drop and property taxes dropped as well. I’m not sure who is seeing drops and rising taxes.

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  4. 4
    dw says:

    One thing to keep in mind, though — the same goes when prices go up. The 5-10-15% YOY jumps we saw in the 2000s did not correspond to 5-10-15% YOY jumps in property taxes.

    The system as it stands means the state actually loses money (or, really, doesn’t collect what it should) when prices go up, but recoups part of that money when prices go down.

    So I don’t feel a lot of sympathy for people who are complaining their tax bills aren’t matching their valuations right now. They never have, and had they, you would have been wringing your hands five years ago when that 4% bump should have been more like 12%.

    On the whole, though, property taxes are a remarkably equitable system of taxation, more so than income and consumption. The only times they’re not are when you have a housing bubble like we just had.

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  5. 5
    magnolia44 says:

    EDIT: to my above post i am sure some are ssing rising taxes, who know what this year holds I am not holding my breath as to lower property taxes. Also the drop as a % of taxes relative to assesement was minimal.

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  6. 6

    There are some other things not mentioned that can also affect the rate. The biggest one is that not all property is SFR property. There is also commercial and vacant land, etc. To the extent those went down more in value than SFR, the tax burden on SFR would increase.

    The other thing is that someone with a five or six figure tax bill is more likely to appeal than someone with a four figure bill. That will shift the burden to lower value properties.

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  7. 7

    RE: TheHulk @ 1 – The bank would pay at the same rate and the foreclosure might not affect the assessment at all.

    I bought my house in mid-October and the assessment for the next year was supposed to be based on the value 75 days later. The assessment ended up being about 10% more than what I paid, so they didn’t take the actual sale into account at all.

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  8. 8
    James says:

    In Skagit County, this effect is in stark relief after the Assessor arbitrarily (and perhaps criminally) lowered the valuations on all commercial property by 10% without the statistical evidence and modeling required by state law. This had the effect of raising the property taxes for SFR by a noticeable amount.

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  9. 9
    sleepwalker says:

    RE: Magnolia44 @ 3

    Yep. My 2010 property taxes are 2.3k where my 2009 taxes were 3.3k. HUGE drop.

    In fact, most of the properties I’ve been looking at have had a big drop from 2009 to 2010.

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  10. 10
    Tim McB says:

    Sorta on topic, sorta off. My wife and I saw a huge tax assessment increase ($568/ from 2.9k to almost 3.5k) from 2009 to 2010. At first I thought there might have been a mistake by the county, but then I realized that they updated their records at the sale of the property. It was previously listed as a 2bd/1bth 1430 square feet on king county records for 2009 to a 3bd/1bth 1760 sq ft in 2010 which I think explains the bulk of the increase I believe since it boosted the assessed value (lucky us).

    I question and a warning. First the warning, our sale was from a long timeowner who’s tax records hadn’t been updated in quite a while. If you’re in the market for a home check any descrepancies between the stated (and physical condition) of the property vs. King County tax records. If there is a difference, expect your taxes to go up proportionally. Since our purchase I still often see differences (actual sf/bd/bt vs. King Country records) of homes now on the market.

    Now the question for Kary or anyone else wanting to take a stab at it. King County is overstating our square footage by 48 square feet. I have official records stating it is overstating it by 90 square feet in the bank appraisal (they’re off as well per our measurement). So should I seek to rectify this; would it even be worth the effort? Would King County accept a bank appraisal as an official document on this subject matter?

    Thanks.

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  11. 11

    RE: Tim McB @ 9

    From the KC Assessor’s website:
    How do I question or appeal the value placed on my property?

    First, call us at 206-296-7300 or e-mail us at Assessor.Info@KingCounty.Gov.

    If we have made an error in the characteristics of your property (for example, the wrong number of bathrooms) we can make a correction and issue a new tax bill if the correction changes your value. However, you must contact us within sixty days from the date on your Value Notice.

    If we cannot resolve your concerns, you can also appeal to the King County Board of Equalization at 206-296-3496, but you must do so by the same deadline. You can get counsel and assistance on how to pursue an appeal from the King County Property Tax Advisor at 206-263-9700.

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  12. 12

    RE: Tim McB @ 10 – First, I don’t know why a sale would cause them to change the characteristics. What in the sale process would tip them off? All they would normally see would be a deed and an excise tax affidavit.

    Second, I suspect they’d accept an appraisal from any source for square footage, but I’ve not dealt with that.

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  13. 13
    Tim McB says:

    RE: Kary L. Krismer @ 12

    I won’t to our property (for privacy reasons) but here is are the assessor notes on the property. See the second note; they were tipped off on the sale of the home. I’m not sure how their able to do this but I feel like in good faith I can’t contest it since the information is indeed true (except their off by a little on the square footage.)

    NOTES

    Note Note Date
    Other nuisance, across from school. 3/4/2010 7:09:00 AM

    Narrow attic room shown in Realtor pictures. Est area. Didn’t classify it as a bedroom. 9/30/2009 10:45:00 AM

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  14. 14
    Tim McB says:

    Re: Ira @ 11

    I found out about this when the bank handling our escrow account sent us a notice of shortage. I didn’t receive a notice directly from King County so I have no idea if I’m in the 60 day appeal window. Perhaps they sent the notice to our escrow bank?

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  15. 15
    Magnolia44 says:

    Yeah so I guess realtors are getting and giving the double whammy. When the house sells they jack up the sq footage counting basements that are not even really finished so they get higher sales prices, new owners get stuck with higher assesments.

    I have a 1/2 bathroom downstairs and a room with walls and quasi tile floor they count as a room but its not used as such. I should get that 400 square feet knocked off but it would be too much work. Also when I finish the other 900 sq ft I will be sure not to report or say a thing (if that day ever comes, hard justifying cash into falling prices).

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  16. 16

    RE: Tim McB @ 14 – I think what you’re seeing from your lender is still from last year. All they’re sending out now is the assessment amount, not the payment amounts.

    This may tell you when the assessment is sent out for your area:

    http://blog.seattlepi.com/propertytaxappeals/archives/210347.asp

    I think condos are on a different schedule, and may even be sent out all at the same time if I recall correctly.

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  17. 17
    David Losh says:

    Wait a minute, isn’t there a web site that helps with tax assessment appeals?

    Only kidding, it’s on the side bar. It is really a timely web site that works well. It’s easy to do, you should try it.

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  18. 18

    RE: Magnolia44 @ 15 – I really don’t think they look at every listing, or would change it based just on a different square footage in the listing. From the comments it looks like they looked at all the photos on that one.

    I wonder if this one just got caught as part of a program to catch remodels? I’ve heard some areas are even using aerial photos to catch unapproved additions.

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  19. 19

    RE: David Losh @ 17 – It’s not on my sidebar (but Ray, don’t worry, your ad shows up!). But if you click on the link I posted, that guy is the one that runs the company (http://valueappeal.com/).

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  20. 20
    Tim McB says:

    RE: Kary L. Krismer @ 18

    The sucky thing is that I have documentation that shows this bedroom all the way back to the construction of the home (1939). It wasn’t a remodel. One of my real estate savy friends suggested that perhaps back during that time period a attic bedroom was not considered square footage due to lower ceilings etc.

    That said I know personally of two people in the midst of fairly substantial basement remodel projects that are totally flying under the radar with this (no permits, inspections, etc.) There won’t be an update to their tax assessment until they sell (a perfect time to escape, let the next owner deal with the property tax hike.) I think that the KC assessment process needs an overhaul in IMHO. That said I’ve always believed what goes around comes around.

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  21. 21
    Tim McB says:

    RE: David Losh @ 17

    Thanks for the tip. I’ve registered with Value Appeals.com. I think we may pursue this. I’m all for paying my taxes, just not overpaying them.

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  22. 22

    RE: Tim McB @ 14
    I just received my notice of assessment last week. Last year the assessor valued my house at 40 thousand plus less than the year before, this year it was valued at 1000 more than last year…..
    Even if the characteristics of the house listed are correct, you can always contest the assessment based on the prices of comparative homes sold .

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  23. 23

    RE: Ira Sacharoff @ 22 – The question is though whether it’s worth it. When they had mine at 10% over the price I had just paid, I concluded it would only be worth it for the experience of having done it, and didn’t do it.

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  24. 24
    David Losh says:

    RE: Tim McB @ 21

    Just as an aside about the guy who came up with the http://ValueAppeal.com/ web site, he developed the idea because he was being tax assessed for a second parking space for his condo. He paid one amount for both, but was assessed seperately. It added hundreds of dollars to his tax bill.

    The way I have it figured from what he was saying is that he had three parcel numbers in one building. That must have made him look like deep pockets.

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  25. 25
    Tim McB says:

    RE: Magnolia44 @ 15

    Yeah, I had the same problem with our basement until we did a remodel. Hard to justify being taxed on a marginally finished basement. I believe they grade each space numerically based on condition, but I’m guessing the whole process is pretty inaccurate.

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  26. 26

    By Kary L. Krismer @ 23:

    RE: Ira Sacharoff @ 22 – The question is though whether it’s worth it. When they had mine at 10% over the price I had just paid, I concluded it would only be worth it for the experience of having done it, and didn’t do it.

    I appealed my assessment once, about 20 years ago, and won, or at least they came back with a number much closer to the one I suggested.
    It was a lot of work, but I was motivated. Sure, if you broke it down into how much money I was ” earning” in the process, i.e how many hours spent on it vs the amount of money saved, it may have worked out to less than minimum wage. But there was a principle involved.

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  27. 27
    ex-WA says:

    By Tim McB @ 20:

    RE: Kary L. Krismer @ 18
    That said I know personally of two people in the midst of fairly substantial basement remodel projects that are totally flying under the radar with this (no permits, inspections, etc.) There won’t be an update to their tax assessment until they sell (a perfect time to escape, let the next owner deal with the property tax hike.) I think that the KC assessment process needs an overhaul in IMHO. That said I’ve always believed what goes around comes around.

    When we had the basement of our Issaquah house finished, the contractor (unbeknownst to us) had not gotten a permit. However, shortly after it was completed someone from King Co showed up at our door, wanting to look at the work so the assessed value could be jacked up. So somehow they find you. (And when we sold the house, we had to get the contractor to get the permit retroactively, since it’s a checkoff item on the disclosure form.) And incidentally the magnitude of the property taxes in King Co was one reason we left after many years.

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  28. 28
    Tim McB says:

    RE: ex-WA @ 27

    ex-WA said:

    (And when we sold the house, we had to get the contractor to get the permit retroactively, since it’s a checkoff item on the disclosure form.)

    Interesting, I didn’t know this tidbit of info. I’ll have to mention that to our friends; I’m not sure they’re aware of it either.

    “And incidentally the magnitude of the property taxes in King Co was one reason we left after many years.”

    I agree property taxes here are high, though not as high as some states in the midwest (read Illinois) and especially the northeast, where a greater proportion of taxes come from property taxes.

    source: http://articles.moneycentral.msn.com/Taxes/Advice/PropertyTaxesWhereDoesYourStateRank.aspx

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  29. 29
    wreckingbull says:

    RE: ex-WA @ 27 – They get around. A Jefferson County appraiser once hoofed it 3 miles down a locked, gated, muddy road and another 1/2 mile down a beach just to get a picture of a little piece of raw land I own. I just about fell out of my chair when I saw my private little enclave on the Web.

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  30. 30
    rosethorn says:

    The Census keeps track of the total number of housing units existing in the US each year. A chart for the period 2000 – 2009 can be found here. The decline in the slope of the increase is obvious starting in 2006.

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  31. 31
    GV says:

    Thanks for the explanation. I have not understood it until now. My property assessment peaked at about $750k then the last two years has dropped to about $500k as I recall. My property taxes keep going up yearly, the state/county keeps hiring more staff, now they say we have to pay more due to deficit. It’s disgusting.

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  32. 32

    I’ve noticed many homes in the King County area (including Seattle) have had their tax bill decrease recently for 2010 — with exception to West Seattle. Our tax assessed value went up with no comps to support it.

    http://blog.seattlepi.com/propertytaxappeals/archives/212055.asp

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  33. 33
    Dirty_Renter says:

    Since I pay no state income tax(obviously) and am a dirty renter, I almost feel like a tax cheat.
    Carry on.
    Dirty Renter

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  34. 34
    SummitSeeker says:

    You could refuse to let them enter your property to inspect the improvements couldn’t you? I mean, it’s not like they have a search warrant (if they do you have bigger problems than assessment values). In the raw land case, could you sue the county for trespassing? You have proof in the photo that was on the web.

    The County would probably make an inflated estimate of the value of improvements if you refused to let them in, so refusing entry may not matter in the end, but it seems mighty haughty of them to knock on your door and want in, or trespass on your property.

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  35. 35
    Jeremy says:

    RE: Dirty_Renter @ 33 – Don’t worry. The property taxes for the home you occupy are built into the rental price. So you pay the tax too – just indirectly.

    I’m thankful for relatively low property taxes in this state. Some other states are much, much worse. (I have Connecticut in mind specifically.)

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  36. 36

    I just noticed the “not to scale” comment in the diagram above. :-D

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  37. 37

    […] The Tim on July 9, 2010 | Leave a responseAs a follow-up on last week’s post about how falling home values can still lead to an increasing property tax bill, I thought I would go a little more detail on how the county assessor comes up with that magical […]

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