Property Tax Valuation and Housing Tax Credits: Irreconcilable Differences?
There is a growing difference of opinion between Tax Credit property owners and county assessors over property values. Tax Credit properties are sometimes called Section 42 properties because of the IRS code section that governs this federal housing program. It is important to note that property owners are not arguing for tax exemption, but rather are seeking what they see as fair and consistent property valuation.
For Tax Credit properties, tenant rents are restricted at levels below market rents and produce less cash flow, and therefore, should be given a correspondingly lower estimated market valuation. Owners of Tax Credit properties believe this is a fair valuation method because the lower rents are restricted through long-term recorded deeds that prevent them, or any prospective buyer, from ever receiving a higher return on their investment.
County assessors appear divided or unsure of how to value these properties, and this debate is further complicated by cash flow limits on Tax Credit properties. Property owners cannot increase Tax Credit project cash flows to cover unexpected jumps in property taxes because of program restrictions placed on rents and cash flow margins. Consequently, a significant jump in property taxes will draw limited cash flow away from other needs, including project maintenance, tenant amenities and normal owner returns.
Whitewater Creek Inc. provides rental housing tailored for low-income people. Headquartered in North Idaho, they have built housing developments throughout the region, including 10 in Washington and Montana. Both of those states do a good job providing a fair valuation of property that utilizes housing tax credits, but according to Whitewater's president, Maryann Prescott, such is not the case in Idaho, where the majority (11) of their properties reside.
In 1968, the Tax Reform Act was created to provide an incentive to developers of rental housing to build quality developments that would be affordable for the nation's low-income residents. As established under the Act, Section 42 of the Internal Revenue Code provides a dollar-for-dollar federal tax liability reduction for owners of newly constructed or substantially rehabilitated rental housing.
The debate centers on one question: Should the housing tax credits used in building the development be part of the valuation equation to determine property taxes, or should they not be -- because adding the value of the tax credits skews the market value of the property and invalidates its "low-income" nature? Answers to that question vary, and some can be quite costly.
Owners of properties receiving awards of Tax Credit under Section 42 are required to enter long-term commitments to affordability. In Idaho, that commitment is usually 40 years. These commitments are perfected through deed restrictions that are recorded at the county where the property is located and ensure that the property will be subject to limitations on rents and the eligibility of persons who may reside in the apartment community. Tax Credit properties serve families earning no more than 60 percent of area median income.
In Idaho, property tax is determined by individual counties, and any challenges to the valuations are determined by the county's Board of Equalization, which is comprised of the county commissioners.
"This is the biggest hot button in affordable housing development presently in the State of Idaho," Prescott said. "There is no apparent consistency on the part of the County Assessors."
Prescott says her firm has had tremendous success with assessors in both Montana and Washington recognizing the limited-income nature of the property and basing valuation on that fact, something that hasn't yet happened with Idaho's assessors. Laura Shaffer would agree but also acknowledges that some discussions are beginning to take place that may result in positive changes to the valuation process.
Shaffer is vice president and chief operating officer of The Housing Company, a nonprofit organization created by IHFA in 1990.
"Property tax valuation can have a huge impact on the economic viability of tax credit developments," said Shaffer. "These properties are underwritten very conservatively. Significant increases in property taxes, once the sources necessary to build the developments are secured and repayment of loans are established, pose a serious threat to the successful operation of the development."
Shaffer said that in recent years, assessors' valuations and an acceptable valuation in her mind were far enough apart to warrant appeal or legal action. "In some instances the processes resulted in a compromise. However, annual compromises do little toward resolving this question in a manner that enables developers and owners to effectively develop and operate properties that will remain economically strong and be an asset to the communities where they are located," she said.
Eliminating the Confusion:
Straight Talk on Property Taxes
Property taxes are a part of our lives, and they are here to stay. As long as they are going to be our constant companions in this journey, let's get properly introduced, shall we?
First, let's talk about what property taxes are and what they aren't. They are not small; they are a significant part of the overall taxes you pay each year-about 29 percent of the state and local tax revenue generated on average in Idaho, according to the 2002 State & Local Government Finance Report by the Bureau of the Census. Approximately $960 million was generated in Idaho in 2002.
Property tax is one of the biggest legs of a three-legged tax "stool" that includes sales tax and income tax. Idaho's stool is more balanced than that of other states, according to Randy Nelson, president of the Associated Taxpayers of Idaho, "but will be less balanced if the temporary 1-cent sales tax (an addition to the 5-cent sales tax already existing) disappears." Idaho lawmakers originally sought to sunset the 1-cent sales tax addition after this year, but that has created concern about the state's revenue stream.
"Property and sales taxes-and that additional penny-will be a real hot topic [in the Legislature] this year," said Nelson. "Some legislators want it to go away, while others want that money to go toward schools or water, for example."
Property taxes are charged according to a specific formula based on need. Primary users of property taxes are public schools, cities/counties, highways and roads, fire protection, and public services.
They are not constant; they change every year depending primarily on need and market value, although the change is typically not significant. Occasionally property taxes rise or fall rapidly. Those are usually tied to either a corresponding rise in property value or a public need. In fact, the residential portion of property taxes increases the most. Even when the economy is down, Nelson said, people still buy homes.
Some resort communities have seen volatility in assessments in the recent past, but for the most part it has been pretty calm. Residential properties make up the majority of the property tax total collected in the state, and that has grown as the state's home ownership numbers have grown. The percentage of owner-occupied homes in Idaho has grown from 71.5 percent in 1988 to 75.8 percent in the third quarter of 2004, and the residential portion of property tax has increased from 49 percent of the overall amount in 1988 to 59 percent in 2003.
Assessments are usually mailed in early June, and the bill comes at the end of November. The assessment is not the final word, however. Every Idaho citizen has the opportunity to challenge his or her assessment through the county and state boards of equalization. Nationally, 98 percent of home owners do not challenge their assessments, but the National Taxpayers Union wrote in 2004 that as many as 60 percent of all home owners should, because they are over-assessed and their bills are not in line with true home value.
Few cases are appealed, yet it appears more should. According to Investors Business Daily in 2001, quoting the Lincoln Institute of Land Policy, those who took their case to the local assessor won an average reduction of 8 percent. Those who went further to the municipal tax court achieved an average reduction of 13 percent.
Property tax also represents the sole tax shift, Nelson said, meaning that for everyone who gets a property tax break, someone else has to make up that difference.
Property Taxes Pay For Host of Services
Property tax. No one likes paying it, but our local counties, cities and schools couldn't run without it. Imagine these local governments trying to provide the same services, but without the $960 million needed for them!
Property taxes are levied to provide a wide range of services, including highways, schools, and fire protection. Property taxes apply to homes, farms, businesses, industry, warehouses, offices, and most privately owned real estate, as well as personal property such as machinery and equipment, and office furniture and equipment.
So, we know that property taxes are needed, but they still seem burdensome. How do we stack up against other states? According to the Tax Foundation, Idaho has one of the highest local/state tax burdens in the nation. For most of the past 14 years, Idaho has consistently had one of the highest state tax burdens nationally, as a percentage of income. It is estimated now that the tax burden for Idahoans is 11th highest in the nation, at about 10.4 percent of income. In contrast, though, Idaho has one of the lightest federal tax burdens (46th), so the state ends up ranking 35th in cumulative tax burden.
Idaho's local governments collected $959,763,000 in property taxes during fiscal year 2002 (the latest year available from the Census Bureau). That equals $713.83 per capita, which ranks Idaho 37th-lowest in local government property tax collections. As a percentage of income, Idaho's local governments collected $28.60 in property taxes per $1,000 of the taxpayers' personal income. By that measure, Idaho ranked 31st-lowest among the 50 states.
Idaho is one of only 12 states in the union that do not have a state-levied property tax. Instead, it is all administered by the counties. As such, there are varying tax rates in different counties. But our recent statewide average, broken down to an urban rate and a rural rate, hasn't fluctuated much:
2003 Average Urban Rate 1.69%
2003 Average Rural Rate 1.17%
2002 Average Urban Rate 1.67%
2002 Average Rural Rate 1.18%
2001 Average Urban Rate 1.67%
2001 Average Rural Rate 1.17%
2000 Average Urban Rate 1.70%
2000 Average Rural Rate 1.20%
1999 Average Urban Rate 1.70%
1999 Average Rural Rate 1.20%
These figures are only a general guide, and you should contact your county treasurer for your local tax rate information.
You know the old saying about the only two certainties in life: death and taxes. Typically no one relishes the thought of either, but here's some good news to wrap up the thought: Idaho is in the unique position of actually receiving more in federal funding than it paid out in federal taxes. Per dollar of federal tax collected in 2002, according to the Tax Foundation, Idaho citizens received about $1.31 in the way of federal spending.
The FAQs of Property Tax
Property tax is one of the "Big Three" revenue-generating taxes used by local governments, along with sales and income taxes. It is the most reviled of the three, however, particularly because as the homeowner ages more value is gained in the home, increasing the burden, but the income tends to be more restrictive, making the tax burden disparate.
Property tax revenue accounted for 29 percent of the total tax revenue (local and state) generated on average in each state in the first quarter of 2004, according to data from the Federal Bureau of Economic Analysis. Yet property taxes remain quite confusing for a lot of people. It may be helpful to provide some answers to the most Frequently Asked Questions about property taxes:
How is Property Assessed?
Idaho law requires that all taxable property be assessed at market value each year. To do this, the county assessor develops valuation guidelines based on the sales prices and some of the features of homes that have recently sold. Some of the features that often influence what a buyer would pay for your home and land include size, quality, age, condition and location.
How Often Are Property Values Adjusted?
The value of your property may change each year depending on real estate market changes.
An appraiser from the county assessor's office is required to visit your property at least once in each five-year period. During the other four years, the county assessor will use information from property sales and/or from the inspections of other properties to estimate the current market value for your property.
How Can My Property Be Assessed on Improvements When I Haven't Made Any?
The term "improvements," as used in property assessment, does not refer just to remodeling or upgrading. "Improvements" are buildings (your house, garage, manufactured home, etc.), paving, or other structures that add value to land, regardless of when they were completed.
What Makes Property Real Or Personal?
Real property consists of land and the improvements that are attached to it. Personal property normally is not attached to the land; it is generally mobile and does not last as long as real property. A copy machine is an example of personal property.
Personal property that is used by the owner in his private home is not subject to property tax. An example is household furnishings. If the same property is used in a business activity, whether in a private home or elsewhere, it is subject to property tax.
Properly registered vehicles, including recreational vehicles, are not subject to property tax.
How Do I Know What Value The Assessor Has Estimated for My Property?
The value for your property is shown on your assessment notice. This is usually mailed by the first Monday in June. If you do not receive this notice, contact the county assessor.
What If I Disagree with The Value The Assessor Has Estimated?
Your county assessor maintains a file of information on your property. If you have questions about your assessment, you should contact them to review the accuracy of the records. You may appeal the valuation to the Board of Equalization for the county in which the property is located. This board consists of the county commissioners. Most appeals must be filed with your county clerk by the fourth Monday in June. Properties assessed at other times of the year have different appeal dates. Property values maintained by your county assessor are public records. You may also ask to review the value of other properties in that county.
How Is Property Tax Determined?
Officials for each taxing district determine the annual budget needed to provide services for the district. The approved budget is divided by the total taxable value of all properties within the district. The result is the district's tax rate. This rate, multiplied by the taxable value of your property, determines the amount of taxes you owe to the district. Every property is located within several independent-taxing districts. This means your property tax bill includes taxes for all the districts in which you live. This combination of taxing districts is known as a "tax code area." Each of these areas is assigned a number which appears on your assessment notice and tax bill. Within each tax code area, the total tax rate is generally the same for all properties. The taxable value of your property determines how much tax you pay in relation to other properties.
When Will I Get My Property Tax Bill?
You should receive your tax bill by the end of November. Contact your county treasurer if you have questions.
How Can My Taxes Go Up if My Property's Taxable Value Does Not Increase?
Tax rates may be affected by a variety of factors. Rates may increase due to a taxing district's emergency needs or voter-approved bonds and override levies. Total tax rates may increase due to the creation of a new taxing district that includes your property. As an example, business has declined and slowed for local industry or agriculture, a county's economy may suffer and affected property values may go down. However, your taxes may be higher since taxing districts still need to pay for basic services.
What Is The Average Property Tax Rate?
In 1998, the average urban property tax rate was l.69 percent. This compares to 2.01 percent for 1993. The average rural rate was 1.8 percent; it was 1.4 percent in 1993.
Are There Limits On Property Tax Increases?
Yes. First of all, most taxing districts have limits on the tax rates they may charge. Second, districts other than schools are limited to annual increases of 3 percent plus an allowance for growth on a portion of their budgets. The growth allowance is determined on the basis of new construction and annexation that occurred during the previous year.
Is Any Tax Relief Available To Home owners?
Yes, Idaho has both a Homeowners Exemption and Circuit Breaker program, which are discussed in more detail on Page 4 in the article titled "Property Tax Relief Available through Homeowner's Exemption, Circuit Breaker Programs."
Property Tax Relief Available through
Homeowner's Exemption, Circuit Breaker Programs
Did you know that filing a simple piece of paper-the Homeowner's Exemption-with your county assessor before April 15 can cut your taxable property value by up to $50,000 (or 50 percent, whichever is less)? If you're elderly, disabled or very low-income, there may be additional relief for you through the Circuit Breaker Program.
Once the Homeowner's Exemption has been filed that first time, home owners need not do it again. It is good for as long as that home owner stays at the residence. That is not the case for the Circuit Breaker Program, which does not automatically renew each subsequent year. Recipients of Circuit Breaker relief automatically get the Homeowner's Exemption, but not vice versa.
"It never ceases to amaze me how many people have lived in their homes for decades and haven't taken advantage of the exemption," said Ada County Assessor Bob McQuade. "We think many people simply don't know about it, or think it's a big hassle to apply for, but it's relatively easy and can be done through the mail."
With the Circuit Breaker, the reduction-up to $1,200-is based on the total household income from the previous tax year.
The Homeowner's Exemption has two different deadlines, depending on if the person is buying an existing home or having a new home built. In the former case, the deadline is April 15 of the current tax year. In the latter, the deadline is 30 days from the time that the county recognizes the new home as a residence, and notifies the home owner thusly, according to the Ada County Assessors office.
The Circuit Breaker is limited to those 65 or older, the blind, former POWs, and very low-income ($21,290* or less the previous tax year after deductions).
The Homeowner's Exemption is available to all Idaho property owners on their primary residence, defined as the place where the applicant has his fixed, permanent home, and to which, whenever he is absent, he has the intention of returning.
Home owners must own and occupy the dwelling as of Jan. 1 to receive the exemption for the current tax year. In filing for the exemption, the home owner must provide clear and convincing evidence that the home is indeed their primary residence. This can be done by providing a copy of a driver's license bearing the property address. If you have questions, contact your local county assessor to find out what is required.
Homeowner's Exemption
Circuit Breaker
Minimum Age Requirement
No
65 or older
Maximum Benefit
50% or $50,000
$1,200
Income Restriction
No
Less than $21,290* household
Filing Deadline
Existing Const: By April 15 New Const: 30 days from notice
By April 15
Renewal
Automatic after 1st time
Required every year
* Cost of Living adjustment applied annually
Nonprofits Look for Solutions to Ease Property Tax Burden
Affordable housing developments have minimal cash flow, and property taxes can make it more difficult to find funds to build and operate housing for low-income Idahoans. One Idaho nonprofit has been working toward fair valuation of affordable housing for the better part of this year.
Until recently, Mercy Housing Idaho had never been asked to pay property taxes on its low-income developments. Canyon County had given Mercy a tax waiver for the Comstock Apartments. It was in place for 10 or 12 years when, in 2003, the county revoked the waiver and taxed the property.
Rich Kenny, project developer with Mercy Housing Idaho, knew the Idaho Legislature had passed a bill in 2002, defining when low-income housing owned by a nonprofit would be taxed. The legislation states that a low-income housing property would be tax-exempt if financed prior to the effective date of the act and if financing were dependent on the exempt status.
"It was a hardship to the property to pay this property tax because it had never been planned for," Kenny said. The apartments did not produce enough rent to pay $12,000-$14,000 in taxes every year, he said.
"The language is pretty clear," Kenny said. "It said if the property being developed was dependent on the exemption, then you would have the exemption."
Mercy Housing appealed to the County Commissioners and to the Board of Equalization, but the county initially refused to reverse the decision. So Mercy took its case to District Court. The day prior to their hearing, county officials agreed to reinstate the waiver if Mercy would allow them to continue to tax its Northside Apartments.
But Kenny's work isn't finished. "We have to do this appeal every year on every property," he said. He plans to appeal any time pre-existing properties are taxed, though he says it eats away at a lot of staff time. "We feel like if we are actively appealing these things, maybe they will not come back next year."
Other counties have not taxed Mercy Housing's pre-existing properties. Kenny said it's difficult for affordable property owners to know what to expect because there is no consistent valuation across the state of Idaho.
Latah County Assessor Steve Fiscus said all of the counties actually use the same valuation approach because it is governed by law and by accepted practices in the industry. However, counties are allowed some discretion in interpreting the statutes, he said.
From housing providers' point-of-view, affordable housing is a worthy candidate for exemption. On the other hand, if a county loses tax revenue, either other taxpayers have to make up for it or public services must be cut.
"I'm not trying to put blame anywhere; it's just a situation. I think everybody is clear that these counties need funding," Kenny said. "We just got caught in this situation."
It is a situation that seems to be increasingly common, said IHFA Vice President for Real Estate Lending Robert Reed. "The inconsistency of arriving at an assessed value has caused real concern among housing providers, resulting in unnecessary confrontations that appear to be increasing over time," he said.
"There ought to be a consistent and equitable way to assess developments that is both equitable to the county and beneficial to the tenants in need of affordable housing, without having a detrimental effect on the financial viability of the development," Reed added.
Fiscus said the solution is in learning. "I think that we (assessors) could use education on the different types of low-income housing and how those are to be considered," he said. "We never hesitate at education."
Others believe clarifications to existing legislation or rulemaking with the assessors may be the answer.
Ideally, Kenny said, there would be a "uniform plan throughout the state so that people had a consistent idea of what was going to happen in each county and how they were going to be dealt with."
Another option, Kenny said, would be for county assessors to agree to assess low-income developments at a reduced rate.
In any case, he said he is open to discussion on possible solutions going forward. After all, it's more than just a problem of nonprofits struggling to pay the tax.
"If developers know that certain counties will charge the full tax amount if you do an affordable project, it may keep the developers out of those areas É so you don't get a spread of affordable living throughout the state," Kenny said, "which I don't think is anybody's intention; it's just kind of an outcome."
Property Tax Charts
Recent History of Idaho Property Taxes:
1994-2003 Who Paid the Tax and Where it Went ($ Millions)
Who Paid
1994
1997
2000
2003
Residential
$339.7
$417.9
$509.8
$637.3
Commercial/Industrial
$202.2
$232.1
$286.9
$331.3
Ag/Timber/Mining
$62.7
$65.7
$70.8
$60.8
Operating (Utilities)
$47.0
$47.9
$46.8
$51.7
Total
$651.6
$763.7
$914.3
$1,081.1
Where To
1994
1997
2000
2003
Public Schools
$285.3
$327.7
$391.9
$467.7
Cities
$127.3
$159.2
$193.9
$231.4
Counties
$155.3
$180.4
$212.3
$247.6
Roads/Hwys
$36.2
$42.3
$50.0
$56.7
Fire
$15.7
$19.3
$24.9
$32.5
All Other Districts
$31.8
$34.8
$41.3
$45.2
Total
$651.6
$763.7
$914.3
$1,081.1
Average Tax Rate
1.683%
1.444%
1.474%
1.465%
Chart - Property Tax Revenue
1st Quarter, 2004
st Quarter, 2001
Property Tax
28.2%
25.5%
Sales Tax
32.2%
31.4%
Income Tax
19.4%
22.4%
All Other Taxes
20.2%
20.7%
Source: Data from Federal Bureau of Economic Analysis
