Property Tax Pitfalls

How Foreclosure Buyers Can
Reduce Their Property Taxes

Q: When is fair market value not "fair market value"?
A: When it's a foreclosure sale.

Because of the process(es) described in "Sticky" Property Taxes, foreclosure buyers should not expect dramatic property tax relief any time soon after closing their purchase. Even worse, unless they're careful to document the initial condition of their property, they may inadvertently be penalized for any home improvements that they subsequently make.

That's because many cities calculate each home's annual tax assessed value as of a fixed point in time (in Minneapolis, it's January 2).

As an example of the potential property tax pitfalls, assume that someone buys a dilapidated foreclosure January 1, 2009 (eleven days ago) for $60,000. Further assume that the foreclosed property's tax assessed value is currently $200,000. While that would make the purchase price 70% below the tax assessed value, in this market such discounts are increasingly commonplace.

So the new buyer's tax assessed value for 2009 is $60,000, right? Wrong.

Because 2009 property taxes are determined January, 2, 2008, the 2009 taxes are already set. That means 2009 taxes are pegged to the old, $200,000 assessed value.

Comparing Bruised Apples to Oranges

So at least the Buyer's 2010 property taxes will reflect the $60,000 purchase price, right? Wrong again.

As of January 2, 2009 -- the date relevant for establishing 2010 property taxes -- the foreclosure was merely a pending sale, as far as the city and county are concerned. It won't be until 6-8 weeks later, when the sale is typically recorded, that the government will know otherwise.

That means the default value for 2010 property taxes is the old, $200,000 tax assessed value.

However, thanks to an informal appeals process, taxpayers effectively have until mid-April to dispute property tax values set January 2. Here's where it gets interesting.

The foreclosure Buyer will definitely want to contact the city assessor assigned to his neighborhood -- the assessors each have geographic territories -- and challenge the $200,000 assessed value. But the $60,000 he just paid is not deemed relevant for establishing property tax values, because foreclosures are not deemed "valid sales" for comp purposes.

Instead, the city assessor can only consider recent, nearby sales of homes that were not bank-owned. In practice, that means that the home's new tax assessed value won't be $60,000, but an amount much closer to $200,000 -- most likely at least $140,000 (in practice, a 30% reduction from the previous year's tax assessed value appears to be the maximum) .

The new owner must also carefully document the condition of the home at the time of purchase.

Otherwise, any post-closing improvements done by the new owner may have been deemed to exist as of January 2, driving up the following year's property taxes!