Sunday, March 30, 2014

The Inequities of the New York City and New York State Property Tax Law

We, as citizens of our society, may assume that, at the very least, the property taxes we pay would be based on the market value of our home. And those that purchase homes for many $1 millions would pay the same percentage as those that pay much less than $1 million.

You might assume that, but you would be incorrect.

Thanks to Regarding New York State Real Property Tax § 1805. See http://public.leginfo.state.ny.us/LAWSSEAF.cgi?QUERYTYPE=LAWS+&QUERYDATA=$RPT1805$@TXRPT01805+&LIST=LAW+&BROWSER=BROWSER+&TOKEN=42288330+&TARGET=VIEW)


The property tax cannot grow more than 20% in a 5 year period and not more than 6% in one year.  But there are exceptions.  For example, you legally repair your home.  Your repairs will go directly into your assessed value and your tax payment can rise much more than 20%, in fact it can rise many 100%'s in one year.

Here are realistic examples:

Case 1: $500K Home

A family buys a home that has been legally renovated.  This property is a two family home and is therefore considered a class 1 property. The current market value is $500K.  The current assessed value is $30K (6% of the market value).  The current tax bill is $5757.30 (.191910*$30000)

Now comes the change.  Because the home was legally renovated, there will be a "Cost Affidavit" submitted to the Department of Buildings.  The Tax Commission and the Department of Finance will add that Cost Affidavit directly to your market value.  In this case the cost affidavit (the cost of renovation) is $300K.

The new market value is $800K.  The new assessed value is $48K (6% of the new market value).  This is a 60% increase.  But wait the Real Property Tax § 1805 says the increase cannot be more than 6% per year.   But there is an exception in the law for improvements.  Therefore, if you improve your home your tax bill will increase in proportion to the improvement.  For class 1 property the tax increase in 2014 would be "$ of Improvement Value" * 6% * 19.191%.  

Read it for yourself:
5. Nothing in this section shall prevent placing on the assessment roll new property, additions to or improvements of existing property or formerly exempt property or the full or partial removal from the roll of property by reason of fire, demolition, destruction or new exemption and such increase or decrease in value shall not be included in the computation of the limitations prescribed by this section. Any parcel which would be assessed at a greater amount but for the provisions of subdivision one or two of this section shall be excluded from any survey or computation made by any body or officer for the purpose of determining a level of assessment to be used in the administrative or judicial review of assessments including, but not limited to, class ratios computed pursuant to paragraph (b) of subdivision one of section twelve hundred two of this chapter, ratios computed by selection of parcels or from actual sales of real property under the provisions of subdivision three of section seven hundred twenty of this chapter, and residential assessment ratios computed pursuant to section seven hundred thirty-eight of this chapter, but not including state equalization rates or class equalization rates. In the event that a parcel appearing on the assessment roll completed in nineteen hundred eighty or any subsequent

Case  2: $1 Million Home 

This home is class 1 and it's current market value is $1 Million.  If there has been no past limit on assessment value increases, then the assessed value would be $60K.  But in this case the New York State Real Property Tax § 1805 limited the assessment value increase to $24K (already this shows the inequity of the tax assessment limit law)  The ratio of $24K to $1Million is 2.4% and not the 6% that is instructed by law.  But we continue, a person buys the home for $2 Million.  Surely the new buyer would expect the market value and the assessment value to increase proportionate to the increase in purchase price.  Clearly the purchaser just bought the home for $2 Million which appears to show an ability to pay an equal share in tax.  But no, the tax limit increase law is in effect for purchases  AND NOT FOR IMPROVEMENTS!  WHICH STRAINS CREDULITY!  Therefore, this purchaser will not see a large increase in taxes paid instead will only see at most 6% increase in a year and 20% increase in a five year period.  And since this home was already affected by the limit it will take 41 years for the proper increase to reach the bill.  


Actual Market Value = $2Million

Billable Assessed Value = $24K
Actual Assessed Value (should be 6% of Actual Market Value) =   $120K

Using the principle of compound interest to increase $24K to $120K at a yearly growth of 4% will take 41 years.  4% is 20% / 5 years and is an approximation of the growth.  In practice, the growth is sometimes slower and therefore the proper tax would take even longer to reach the owner.


The appropriate property tax should be $23,029 but instead this owner pays only $5K


So our homeowner that repairs his home with a 60% investment sees his tax bill go up by 60%,  but a homeowner that increases the market value of his home by 100% sees only a 4% to 6% increase.  


This change to Case 1 is cumulative since the tax bill comes every year.


If you want to see a list of properties and owners that are paying very small percentage of tax because their assessed value is much below the 6% ratio of assessed value to market value maintained by law.  See http://storage.googleapis.com/acris-nyc-personal-real-estate/assessed_to_market_value_NYC_LOWEST.csv



The most important fact in the spreadsheet is the ratio of assessed value over market value.  This is capped at 6%.  You are probably paying/assessed close to 6% while others are paying/assessed much less than 6%.


Some of the lowest are practically 0.  Some of these are government buildings but NOT ALL.