You are probably more comfortable with the basis for income taxes and sales tax. These two taxes have rules everyone can understand. You can probably calculate sales and use tax in your head; and you can calculate income tax with the help of a calculator. You understand the logic of how the tax is calculated. Property or real estate tax is a different matter altogether – it has its own inscrutable set of rules. If you find it confusing it might be comforting to know you are not alone.

According to a recent article in USA Today home prices might be falling, but property taxes continue to rise. According to Freddie Mac, house values have declined by more than 30 percent since 2007. Yet while home values and prices were crashing, property taxes across the U.S. were climbing. The increase in FY2009 was 2.7%, 4.8% in FY2008, and 6.4% in FY2007. Confirming most initial responses to these figures, the National Taxpayer’s Union reports that between 30 and 60 percent of all taxable property in the U.S. is over-assessed. Typically less than 5 percent of taxpayers challenge their property or real estate tax assessments.

How is it possible that property taxes continue to rise when property values are plummeting? Is it possible to make sense of this anomaly? Finally, if you do unravel the mystery of your property tax assessment, what can you do about it?

What Is My Property Worth?

The basis and calculation of property or real estate tax varies from one state to another. Tax rates can also vary from one county to the next. An excellent example can be found in Orange County, Florida. The property appraiser’s web site specifically answers the question, “How can the assessed value of my house increase when the market value is decreasing?” The answer is that the law of the State of Florida requires all county Property Appraisers to increase the assessed value of homestead properties annually by either three percent or the percent change in the Consumer Price Index (CPI), whichever is lower. In 2009 the increase was only .10%. Thus, in 2010, the market value of most homes is continuing to decline. Yet under Florida law, the assessed value could still increase by a full .10%.

Thus far we have established that your property or real estate tax is based on the assessed value of the property. But what is the assessed value?

According to Florida law, the county property appraiser is to determine the assessed value of each property on the basis of its market value on January first of each year. This is the point where differences come into play.

The assessed value is based on several factors including:

• Size
• Location
• Condition of the property

and many other factors. The factor that is at the root of the disagreements is the value based on the property’s sales price in the open market under prevailing market conditions. The crux of the issue is that prevailing market conditions are always in a state of turmoil, trying to balance itself out between the skyrocketing prices in 2005 and plummeting sales and prices in 2008 and 2009. Further, as the Federal homebuyers’ credit expires we can expect measurably lower sales, according to the chief economist of the National Association of Realtors.

So what guidelines do the property tax appraisers follow in such volatile market conditions? Are we any closer to unraveling the mystery of property tax? In Florida, we have discovered the central issue.

The Florida Department of Revenue Real Property Appraisal Guidelines provides that the process of determining whether real property market prices are indicative of the current market value involves an appraisal judgment.The requirements for an appraisal judgment are complex; yet they are, nonetheless, subjective. To calculate the property tax amount, therefore, the tax assessor determines the assessed value less any exemptions multiplied by the millage rate.

To Appeal or Not To Appeal

So how can you, the taxpayer, know when you should appeal your property taxes? If the assessed value of the property is higher than its market value, it would be a good idea to review your tax bill with a property tax professional to determine the grounds for appeals. Simply working on a gut feeling will not do the trick. Further, if the property was purchased in a foreclosure or shortsale at a great price, it will not be considered as the market value of the property. The tax assessor will be assumed to have used his “best estimate” based on other comparable properties to determine the assessed value of your property. However, the tax assessor will not have accounted for the repairs you had to make, which could reduce your taxes substantially.

A property tax professional will be able to guide you through all of the available exemptions and other value reducers (such as drainage issues, easements, re-zoning, heavy traffic, nearby railroad tracks or highways, industrial pollution) that could potentially reduce your property taxes. The appeals process can be lengthy in some cases. It is a tedious process, but it can be done.

Should you decide to appeal your property tax bill on your own, you will still need the help of a Realtor®, an appraiser, or a realty attorney to assist in gathering some of the information you will need. You will also need an understanding of the appeals process, the deadlines for filing appeals and the evidence necessary to make your case. For information about Florida property taxes, visit your local county property appraiser’s web site to review the guidelines. You will also need to review the appraised value and the market value of comparable homes in your community to determine the amount those homeowners are paying for property taxes. In most cases, this information is public and is available from your tax assessor’s office.

Regardless of the method used in the appeals process, remember that every taxpayer has the right to appeal their property tax bills. With your knowledge of unraveling the mystery of property tax, the proper research and the use of professionals, you can weigh the cost of the appeal against the potential benefit of winning to make your final decision. Should you decide to appeal and win your case, you can save hundreds or thousands of dollars in potential tax savings. You would also continue to save in future years as the market continues to find its equilibrium.

About Prithi Daswani

Prithi Daswani is Founder and Managing Partner of The Centurion Financial Consulting Group. She holds a B.S. in Accounting and Management Information Systems and a MBA with a Specialty in e-Commerce from Florida Atlantic University. She is a Certified Public Accountant with the State of Florida, a Member of the Florida Institute of CPAs, a Member of the Information Systems Audit and Control Association, a member of NETImpact Orlando, and a member of the United States Green Building Council. She has assisted clients in various industries, including energy, manufacturing, healthcare technology, pharmaceutical, agricultural and financial. In addition to extensive experience and trailblazing work on behalf of clients on various tax issues and tax minimization strategies, Prithi continues her focus on rising taxability issues relating to green tax credits and various incentives.

About Centurion Financial Consulting Group, LLC

The Centurion Financial Consulting Group is a Certified Public Accounting firm providing highly personalized comprehensive tax and business consulting services to individuals, small businesses and large corporations. With special expertise in energy, manufacturing, pharmaceutical, high-tech and real estate, CFCG appeals to a diverse clientele across the spectrum from multinational corporations with gross revenues in excess of $10 million to small business owners and individuals. Centurion’s CPA team members average seven years experience with one of the Big Four Firms, with the majority of our staff consisting of Ernst and Young alumni. The experience and the deep knowledge base of our staff allows CFCG to offer the personalized service of a local firm combined with the breadth and depth of knowledge typical of a national accounting firm.