3 Keys to Win Your Tax Appeal

Recently, I was talking to a friend who had received a "Notice of Increase in Assessment" for their real estate. My friend said that this increase was based on their recent purchase of property, and not any change in the value they created.

It is standard that, when you increase the value of a property, the County Tax Board may increase your assessment - and, consequently, your taxes - as a result of your improvement to that property. Basically, if you renovate a building, expect an increase in taxes.

However, my friend said their notice was simply due to the fact that they had just purchased to property, and for a good bit more than the last time it had sold.

In Pennsylvania, we do not change assessments automatically when a property is sold, unlike many states which do change assessments at the time of sale based on the higher sale price. Because Pennsylvania does not change at sale, I was confused as to why they would be allowed to increase my friend's property taxes. Singling out a particular sale to target is against the law. So what's the deal?

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Step 1: Understand How Property Taxes are Established

Pennsylvania has a constitutional requirement for uniformity of taxation. Counties are the governmental unit principally responsible for assessments. They typically meet the uniformity requirement by adopting a "base year" market value. A countywide reassessment is conducted, and the values are determined according to the market as of the date of the reassessment. This date becomes the "base year". The county then applies a percentage to that market value, which is used to calculate an assessment.

Counties vary on how often they conduct a county-wide reassessment. Some, like Lancaster County, have a statute to reassess every 8 years, while others, like Lebanon County, saw 40 years between the most recent update and the assessment prior.

Below is a list of the local counties in Central PA and their current base years:

• Lancaster County: The last assessment was 2018, but currently uses the base year of 2015 - reassessment is done every 8 years by statute
• York County: Current assessments are done based on 100% of the market value as of 2004
• Adams County: Current assessments are done based on 100% of the market value as of 2010
• Dauphin County: Current assessments are done based on 100% of the market value as of 2001
• Cumberland County: Current assessments are done based on 100% of the market value as of 2010
• Berks County: The base year is 1994
• Lebanon County: The base year is 2012

How do you know if the assessment on your property is accurate?

Every county in Pennsylvania has its assessments analyzed annually by the State Tax Equalization Board (STEB). STEB studies the selling prices of properties within each county and their assessed value as of the time that they sold. From this data, they develop a statistic known as the "Common Level Ratio of Assessment". This is a percentage that indicates the relationship of assessments in the county to today's market value. A new ratio is released on or about June 15th every year.

For example, the current Common Level Ratio as of July 1, 2023 is 56.8 for York County. This means you would take the ACTUAL MARKET VALUE of your property today - for instance, $2,000,000 - and apply the ratio as such:

$2,000,000/1.76=$1,136,000 assessed value based on 2004 base year for York County

Thus, if your real estate assessment is less than this number - you may be under-assessed.

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Step 2: Know How the Governing Bodies are Basing the Appeal

More of the time, a school district may be the one to file an appeal to increase your taxes. The school taxes are the highest, and thus they have the most incentive to target property assessments.

The assessment of a particular property may be revised at any time for "cause". Cause is typically a change in one or more physical attributes of the property, such as a new addition, a large renovation, or other alteration that enhances its market value. Normal maintenance, such as painting or replacing a roof, does not cause reassessment. To maintain uniformity, values that are changed must continue to represent the base year market value.

These days, however, there are more and more school districts challenging tax assessments based on sales. For example, they might see that you purchased a property for $500,000 but are only assessed at $250,000. So the school district will file an appeal to the Board of Assessment, basically saying "You got this one wrong. Look at the difference between the sale price and the assessment."

What the school districts are doing in appealing taxes at sale is not seeking actual market value for assessment, but rather having the assessed value equal to the base year value.

There is a serious legal question about whether or not these "recent sale" appeals violate Pennsylvania law regarding establishing taxes fairly. The school districts and taxing entities have gotten around the uniformity argument by alleging that they have set reasonable standards that apply equally to all of the properties within their districts. For example, they have only appealed properties that have recently sold and whose current assessment is less than 80% of the recent purchase price. It makes sense.

But at the same time, it does not make sense when two properties are similar - let's say they're both assessed at $300K. If one sells for $600K and the recent buyer is the only one whose assessment was appealed, they could end up paying twice as much in property taxes as their neighbor with a similar house who simply hasn't sold it. And the neighbor's house is not allowed to be appealed or changed.

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Step 3: Understanding the Burden of Proof

In order to change a property assessment value, the filing party has the burden of proof. When schools file an appeal against a property owner, the school district has the burden of proof.

Specifically, the burden of proof is on the filing party to prove that the market value of the subject property is not accurate, either too high or too low. To meet the burden of proof, a valuation method must be used to arrive at a market value.

In Pennsylvania, 3 recognized valuation methods may be used:

1. Comparable sales approach
2. Cost approach
3. Income valuation approach

The comparable sales approach is exactly what it sounds like. It means the filing party must find comparable sales of similar properties and use those sale prices (not the tax assessments) as evidence to change the assessment. The cost approach is generated by looking at the construction costs of the building. This typically only applies to new construction properties. The income valuation approach is generated by analyzing the net operating income of a property and then applying a capitalization rate to determine a fair market value for the property.

A sale price on its own does not meet the burden of proof for a tax appeal filed by a taxing entity. Recent purchase prices of a subject property are persuasive but are not conclusive. This means that school districts cannot change an assessment of a property simply by handing in a copy of the deed as evidence. The sales price is not controlling in an assessment appeal, and the evidence must include comparable sales or another valuation method.

The primary issue for current appeals (either from the property owner or a taxing entity) is the fair market value of the property, either in the current year with the county's Common Level ratio applied or as of the base year. This can get complicated, but whoever files the appeal can actually choose at the hearing which argument they are making for the appeal.

The base year argument is simply looking at the value of the property as of the base year. The fair market value is different. The FMV tries to determine the current market value, and then applies a common level ratio which changes every year backward to arrive at the base year assessment.

It is an enormous advantage for the school districts to use the fair market value approach because they can attempt to use the recent sales price as proof of market value and raise the property assessment accordingly.

You can provide evidence of your property's value in the base year in order to combat the higher assessment.

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Example

Let's say you own a property in Lancaster County. The property is currently assessed at $547,200. The Common Level Ratio to get to market value is 1.66 (see the chart here).

$547,000 x 1.66 = $908,352

If your property is worth less than this number - you are over-assessed. If the property is worth more than $908,352, you are likely under-assessed.

If you have received a notice of an increase of assessment, compare the actual values in the base year to the value of the property based on today's FMV, using the Common Level Ratio, to see if you would be able to make a cause for a lower assessment using the actual base year data.

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Conclusion

Knowledge is power when it comes to understanding and managing your taxes. Since property taxes are usually the largest cost of a real estate investment, it is in your best interest to understand how these values are established.

Need a recommendation for help with a tax appeal in Pennsylvania? Feel free to contact us for a connection.

Naomi Brown, CCIM

Principal, Senior Advisor

Broker of Record

Multifamily and Land Specialist

(o)717.820.1127

(c)717.819.2825

[email protected]

CAPSTONE COMMERCIAL

205 W Caracas Ave | Hershey, PA 17033