April 12, 2013

Property Tax Assessments

Patrick Laverty

Based on some Twitter chatter this morning, I learned that the property tax assessment letters are going out today in Providence. The citizens of our capital city are learning what value their homes and land will be taxed at. There is always some confusion as to what this means.

First, the city should be using a value that they think is the current fair market value for the land and the building on it. This should be approximately what the property would sell for on the open market. I've seen many times when these aren't even close, especially in my own town and my own property. I tried selling mine for nearly $30,000 less than the assessed value and I couldn't even get an offer. My solution to this would be to require the town or the company doing the assessing to purchase the property at this assessed price, if the owner is willing to sell, within 30 days. I'm guessing the property values would be set much more closely to what is realistic at that point.

But what do these values mean? If your assessed value goes down, does that mean your property taxes will go down too? Not likely and in most cases, they'll actually go up. They go up because the town still needs (or thinks it needs) additional revenues every year. Employees get raises, services and goods like electricity, heating oil, natural gas, are all things that cost more.

The way a city derives your tax bill is actually in two pieces. Neither piece means anything by itself. It's a combination of the assessed value and the tax rate. According to RILiving.com, the last property tax rate for non-commercial property was $31.89 per $1,000 of assessment. If your property is assessed at $300,000, simply mutiply that $31.89 by 300 and you get your property tax bill of $9,567 per year. However, Providence does offer a homestead exemption. This means if the property is your primary residence, Providence cuts that bill in half. Well, unless you're the Governor, then you can live anywhere you want and still get the homestead exemption.

Seems pretty straightforward. The town has their rate, does their assessments and that's their revenue. This would seem to be a problem if the property values drop at all. That would mean less revenue for the city, right? Nope. The cities actually do these calculations in reverse. In a way that might not really make sense. First they figure out how much money they need for everything they want to do and everything they want to support. Next, they take the total assessed value, divide one by the other and the result becomes the tax rate.

In a nutshell, your assessed value going down really doesn't mean anything at all. You need to take both values, assessment and the tax rate into effect. Because the city doesn't want to have a decrease in revenues along with the decrease in assessed value, they will in turn either increase the tax rate, lower or eliminate the homestead exemption or some combination of both.

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I recently purchased a home where the seller was in a hurry to sell due to a sudden job transfer and had priced the house below comparable listings. I was surprised that the assessment came back roughly the same as the sale price because both my realtor and the seller's realtor agreed the house was "worth" more. I did some "research" online, and the consensus seemed to be that the typical assessor assumes the sale price is what the house is "worth" and then makes very minor adjustments for external factors. It's not a horrible assumption under most market circumstances - I've long said things are worth what people are willing to pay for them - but I guess I was surprised at how mechanical the assessment was. As far as I can tell, it didn't account for the somewhat unique circumstances under which the house was sold.

Posted by: Dan at April 12, 2013 1:22 PM

What is the rationale for having a tax bill halved because it is "owner occupied"?

I suppose it has the effect of transferring more of the total tax burden to tenants, is that "fair"?

Do owner occupied multi family buildings get the same break?

Posted by: Warrington Faust at April 12, 2013 9:14 PM

Ultimately, assessments only change the distribution of the tax burden in the town. Those whose property goes up in value shoulder a larger percentage of the total tax levy compared with those whose property goes down in value.

I suspect that has something to do with the peculiarity in Providence, yesterday, that land went up and structures went down. To figure out the effect, ask yourself who has more of their real estate value in land and who has more in buildings.

Posted by: Justin Katz at April 13, 2013 9:27 AM

I purchased my house in December 2011. Shortly thereafter, we were assessed $38,000 higher. Accompanied with the reassessment letter was a statement that we could appeal the new assessments. I felt that I had a pretty good case for a reduction! Well, I went to my appeal hearing, and the City bureaucrat agreed with me that I had a valid case. Well, we then were told that our assessment went up $1500. Welcome to rhode island. This was in Cranston.

Posted by: Bill at April 13, 2013 11:47 AM


Relatively few people actually follow through with an appeal, so they are frequently thrown a bone to get rid of them.

An argument that you are assessed higher than neighbors is seen as an argument to raise the neighbors.

I was unaware of the Providence Homestead provision. Several times, while thinking of moving, I looked over the East Side on Zillow. Each time I have taken a pass because of the tax bills quoted.

Posted by: Warrington Faust at April 13, 2013 2:20 PM

Do owner occupied multi family buildings get the same break?
Posted by Warrington Faust at April 12, 2013 9:14 PM

I think it is pro-rated so you only get the exemption for one unit.
Someone can correct if this is wrong.
I am lucky enough to NOT live in that city.

Posted by: Tommy Cranston at April 14, 2013 12:28 PM

"Do owner occupied multi family buildings get the same break?
Posted by Warrington Faust at April 12, 2013 9:14 PM

I think it is pro-rated so you only get the exemption for one unit.
Someone can correct if this is wrong."

I guess that means that tenants take in the neck no matter what.

A few months ago I did a drive by of a large 2 family I had seen on Zillow. It was a foreclosure listed at 190K, the tax bill was 13,000 +/-. That was in line with neighboring properties.

Posted by: Warrington Faust at April 14, 2013 6:49 PM

Owner occupied two, three and four families get the 50% homestead exemption. Landlord owned 1-4 units get a 15% exemption. Totally unfair.

Providence is a tale of two cities: The East Side (ES) and Everywhere Else (EE). The East Side's values in this recent reval either stayed the same or dipped a bit. The ES median single family price at the end of 2012 was $445K, which would give an owner occupant a tax bill of $6800. The EE single's median price was $90K, generating a tiny tax burden of around $1,400 a year. That was probably what that home was paying 15 years ago.

To compare to the rest of the state, the median price was $190K and the average tax rate is around $18/1000 for a tax bill of $3400 a year.

Landlords and their tenants are getting screwed royally, with an effective rate of $27/1000, 50% higher than the average state rate.

From what I've seen for the new revals: ES slightly down in values. South Side 10% or so up. West Side down 20%, North End down slightly.

Posted by: RIGuy at April 15, 2013 11:38 PM

RIGuy: "Providence is a tale of two cities: The East Side (ES) and Everywhere Else (EE)."

I think that is the story for most medium/small cities. The EE's require most of the police, fire, school and social services, while paying low taxes. As those neighborhoods decline so do property values, tax bills follow that decline. The ES's carry them. Finally the tax burden (and sometimes crime) force the people out of the ES's, or at least diminish the attractiveness of those neighborhoods. Basically, they move to Warwick, East Greenwich,etc.

Posted by: Warrington Faust at April 16, 2013 7:10 PM
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