Taxation of Residential vs. Non-Residential Property In Colorado Is a Growing Problem

How real estate is taxed varies greatly from state to state. Here in Colorado, we are blessed with very low property taxes compared to many other states. According to USA Today, Colorado has the 7th lowest property tax rates in the country, although that is a statewide average. The median-value home in Colorado has a property tax bill of just over $2,000 per year, whereas the median-value home in New Jersey, the highest taxed state, has an average property tax bill of over $7,200. In suburban New Jersey, property tax bills over $20,000 per year are not uncommon because of the higher values, not just due to higher local tax rates.

In Colorado, property taxes are very much a local affair. Recently there was a hullabaloo over Metropolitan Tax Districts, in which mill levies can double the property tax in newer subdivisions. You can read my Dec. 26  column on that topic at JimSmithColumns.com.

This week, however, I’m going to address a different property tax problem that is getting worse every year and has little prospect of being solved politically.

The problem is the growing differential in property tax rates for residential vs. commercial and other non-residential real estate, such as vacant land. First you need to understand that property taxes are levied against the “assessed” value of real estate, which is a small percentage of its  actual value. While the assessment rate for residential property — currently 7.15% — keeps going down, the assessment rate for non-residential property is fixed by the state constitution at 29%. That means that the property tax on residential real estate is 1/4 the property tax on non-residential real estate of the same value.

Rita and I own two pieces of real estate—our south Golden home and the Golden Real Estate office building. The county assessor values our home at twice the value of the office building, but the property tax for our home is one-half the property tax for the office building.

Vacant land is considered non-residential, so it, too, has an assessment rate of 29%.  As I’ve written before, this puts enormous pressure on the owners of vacant land to develop it, which is upsetting if, like me, you value keeping vacant land undeveloped.

To understand how unfair the taxation of vacant land can be, consider a 20-acre parcel in Jefferson County that is currently listed for sale. The county’s current valuation of the parcel for tax purposes is $275,554, so its assessed valuation is 29% of that, or $81,071.  If the buyer of this land builds a high-end home on it, the valuation might increase, for argument’s sake, to $700,000, but its assessed valuation would be only 7.15% of that value, or $50,050. Thus, the property tax bill would drop by nearly 40%, even though the value of the parcel has nearly tripled!  The current owner is paying over $7,000 per year for his land to sit vacant.

As I’ll explain below, the assessment rate for residential property keeps falling.  Last year it was 7.2% and two years before that it was 7.96%.  Prior to 1982, property of all types had an assessment rate of 30%, but the Gallagher Amendment changed the non-residential rate to 29% and the residential rate to 21%.  Most significantly, the amendment also dictated that the residential assessment rate should be adjusted to retain that year’s 45:55 ratio of residential to non-residential statewide property tax revenue in subsequent years.

As a result of that provision, since total residential valuations have grown much faster than non-residential valuations statewide, the 21% assessment rate of residential property has kept falling and will continue to fall.  And this is likely never to change, since owners of residential property are the voters, and it’s unlikely that homeowners would ever vote to increase their residential property taxes in order to soften the property tax burden of businesses. 

Bottom line, residential real estate will continue to bear an ever smaller property tax burden compared to non-residential real estate, and owners of vacant land will feel more and more pressure to develop their vacant land or sell it to developers. The only alternative is to put livestock on the land or to farm it so they enjoy the even lower agricultural property tax rate, but the rules for qualifying for the agricultural rate are fairly strict and are aggressively audited, I would expect, since the cost to counties in lower tax revenue for agriculturally zoned property is pretty substantial.

Denver Post Series Uncovers the Corruption of Tax Districts Created by Developers

Four years ago, on Dec. 17, 2015, I devoted this weekly column to explaining why property tax rates vary so much around the metro area, mostly due to the creation by developers of “metropolitan  tax districts” to reimburse themselves for the cost of building the infrastructure for their subdivisions. A follow-up column on July 21, 2016, went into greater detail, giving examples of such tax districts created for Stapleton and Green Valley Ranch in Denver and Solterra and Candelas in Jefferson County. For example, in Candelas, adjacent to Rocky Flats, homeowners are paying a 70-mill tax levy on top of Arvada’s mill levy until the tax district infrastructure bonds are paid off. For a home valued at $500,000, that would be an additional property tax burden of nearly $3,000 per year, which would only increase based on rising property values for 30 years following construction. Below is an excerpt from that column, which quoted mill levies in effect that year:

You can read both columns at JimSmithColumns.com, where all my prior columns are archived – or simply click on the links provided above.

It was clear to me back then that homeowners would not recognize the special tax burden they would be facing as they purchased homes, since disclosure of that tax burden is buried in the flurry of documents buyers have to sign at closing.

Now, with more and more owners of homes in such subdivisions realizing what they got themselves into and how unfair it is, it was inevitable that some investigative reporter would dig into this topic in a way that I could not as a full-time Realtor. 

Earlier this month, investigative reporter David Migoya’s multi-part series on this important topic was published in the Denver Post following eight months of research. Perhaps you read that series.

Migoya provides an excellent summary of what these districts are: “Metro districts are taxing authorities created by subdivision developers, with the consent of the local government, for the sole purpose of selling government-like bonds to finance their projects. Repayment of the bonds is tied to future property taxes assessed to the homes that will eventually be built.”

Among the things I learned from Migoya’s multi-part series that I did not know or realize when I wrote about metropolitan tax districts in 2015 and 2016 was that this device of creating special tax districts for infrastructure investments began to be utilized because 1992’s Taxpayer Bill of Rights (TABOR) made it harder for cities or the county to invest in the infrastructure of new subdivisions, even though these subdivisions would ultimately pay for themselves through new property taxes. (I’m not fully convinced of that argument, since many newer subdivisions, including mine, were built without such tax districts.)

Migoya’s series went further to describe the scheming which kept property owners from being able to control the tax districts once the subdivisions were fully built out.

If you are in one of those newer subdivisions, you probably are subject to such a mill levy. If you didn’t read the series when it was published in the main section of this newspaper, I suggest you Google “Denver Post metropolitan tax districts” and read the full series. It should make your blood boil.

One could apply “scandalous” to how these tax districts were created and are run to profit developers at the expense of unwitting future homeowners, but the fact is that what the developers have done is legal, manipulating laws passed by the General Assembly and signed into law by previous Governors.

As Migoya explained so well in his opening installment on Dec. 5th, “Colorado law permits developers to elect themselves to serve on a district’s board of directors, then use that position to approve tens of millions of dollars in public financing for their businesses, and leverage the property taxes on homes they haven’t yet built. No regulations stop these developer-controlled boards from approving arrangements that are financially advantageous to their business, allowing them to finance overly ambitious plans without fear of liability, knowing future homeowners ultimately shoulder the burden.”

Surely the upcoming legislative session will feature hearings and legislation to address the worst abuses of this tax district tool, but the damage may be irreversible in the state’s 1,800 such existing tax districts, since they were created pursuant to existing laws.

Depending on how aware buyers and their agents become of these oversized tax burdens, the resale value of homes in those subdivisions should reflect the fact that they have a far greater tax burden than comparable homes in areas without such a developer-created tax district.  You can count on Golden Real Estate’s brokers being knowledgeable in this area.

The Value of Local Journalism

I have been concerned that the reduction in the reporting staff at the Denver Post would make investigate series like the one above a thing of the past. The “Afghanistan Papers” series by the Washington Post is another example. Subscribers make the investment in such journalism possible, so thank you for subscribing to the Denver Post.

By the way, please note that our “Real Estate Today” column in the Denver Post also needs your support. It is our primary marketing tool. You can assure this column’s continuation by coming to us with your real estate needs and recommending us to others. Thank you!

Property Tax Is the Original ‘Wealth Tax’

Like you, perhaps, I was surprised and not quite sure what to make of the proposal from more than one presidential candidate to impose a wealth tax, not simply an income tax, on the super-rich. 

Then it occurred to me that it’s really nothing new. Homeowners already pay a “wealth tax” in the form of  property taxes, but it’s not a graduated tax paid only by the super-rich, as proposed by Elizabeth Warren and others.

Here’s What You Need to Know About Appealing the Assessor’s Valuation of Your Home

By the time this column appears in print, all Denver and Jefferson County homeowners will have received in the mail a letter from their County Assessor declaring the “Actual Value” of their real estate holdings. The same is happening in all Colorado counties. The letters give taxpayers until June 3rd to file an appeal of that valuation which, if successful, could lower the “Assessed Value” (explained below) against which taxes will be levied for 2019 and 2020.

Property taxes in Colorado are paid in arrears, which means that the property tax for 2019 isn’t payable until April 2020, and the property taxes for 2020 will be payable in 2021. The valuation you just received in the mail, however, is not a statement of your home’s current value.  Rather, it is a statement of your home’s market (or “Actual”) value as of June 30, 2018, based on its condition on January 1, 2019.

In other words, if your house was significantly improved between June 30, 2018 and January 1, 2019, the assigned value should be what your home in its new condition would have been able to sell for on June 30, 2018, based on what comparable homes did sell for prior to that date. (You may need to read these two paragraphs a few times!)

The good news is that even though your home’s value has continued to increase since last June and will likely continue to rise for the next year or two, you will only pay property taxes for the next two years based on what it might have sold for in June of last year.

Nevertheless, many of us (me included) are going to be shocked at how much the assessor claims our homes have increased in value.

Additional good news for homeowners is that, because of both TABOR and the Gallagher Amendment — too complicated for me to explain here — the percentage of “Actual Value” against which your local mill levy will be applied keeps going down—from 21% of actual value in 1982 to 7.15% today. That percentage creates the “Assessed Value.”

To keep it simple, here’s an example using round numbers. If the assessor said the market value of your home as of June 30, 2014 was $500,000, your “Assessed Value” was 7.96% of that, which equaled $39,800.  If your mill levy was 100, then your tax bill was $3,980 (100 x 39.8).  Let’s say your home’s “Actual Value” as of June 30, 2018 rose to $600,000, a 20% increase. Your new “Assessed Value” is 7.15% of that, or $42,900. Thus, your tax bill, at 100 mills, will be $4,290, a 7.8% increase in your property taxes despite a 20% increase in market value. That’s only $90 more than if your home was worth $200,000 in 1982 when the assessment rate was 21%!

And it gets even better. Unless the voters in a particular tax district voted to “de-Bruce” the mill levy, that tax district must lower its mill levy as much as necessary to keep its revenue from increasing beyond TABOR limits based on population growth plus any increase in the cost of living.

Nevertheless, since your property taxes are the sum of multiple mill levies from various districts, that hypothetical rate of 100 mills that I used above might actually be lower this year, further reducing your property tax bill.

Here are two key points you must keep in mind when appealing the valuation assigned to your home by the Denver assessor:

1) You can only appeal the assessor’s valuation by citing comparable sales during the 24 months prior to June 30, 2018. Unless your home was mischaracterized (wrong neighborhood, style, etc.), all eligible comps are listed under “Comparables” on the assessor’s web page for your home.

2) You must “age” every comp you cite in your appeal by about 1% per month, since the median increase in our residential property values was about 24% over that 24-month period.  Thus, if a comp sold in January 2018 for $500,000, you can’t cite it as a comp at that price, but must increase that price by 6% to obtain its value as of June 30, 2018.

To find your home on the Denver assessor’s website, visit http://www.denvergov.org/property and enter your address. When your property is displayed, then click on the address and you’ll be able to click on a “Comparables” tab where you’ll be able to see exactly how the value of your home (the “Subject” property) was determined against three or more comparable sales identified by address. If you feel that those comps are not truly comparable to your home, you can click on the “Neighborhood Sales” tab and choose three or more other comparable sales and cite those in your appeal. You have to file your appeal by June 3rd.  Over the years, I’ve found in-person appeals to be most successful.

To find your home on the Jefferson County assessor’s website, visit http://assessor.jeffco.us and click on “Prop-erty Records Search” in the lower middle of the screen, then click on “Address” on the left of the screen.  “Sales” is on the top center. This is all explained on a website that I created for Jefferson County appeals, www.HowtoAppealValuations.info.

Attention Homeowners: It’s Reassessment Season!

This week you should have received the new valuation opinion from your county assessor. Your 2019 and 2020 property taxes will be based on that value, which is what the assessor believes your home might have sold for on June 30, 2018. In next week’s column I’ll explain the process for appealing that valuation to lower your tax bill.

Property Taxes in 2019 Will Be Based on the Value of Your Home This Saturday

Real_Estate_Today_bylineColorado’s constitution mandates that every county assessor base the assessment of real estate taxes on the full market valuation of each parcel as of June 30th of every even-numbered year. Next May, the assessor will mail out an estimated value as of this Saturday to each parcel owner, giving until June 1st to challenge the assessor’s valuation.

If you are wondering how much your property taxes might go up for the next 2-year cycle, you need only compare what your home might have sold for on June 30, 2016, with what it could sell for now, based on the sale of comparable homes.

Although June MLS statistics aren’t complete yet, let’s compare current sales statistics with those from June 2016. (Remember: Not all sales are on the MLS.)

Statistics for Denver:

Using REcolorado (Denver’s MLS) as my source, the average price per total square foot (PSF) of condos and townhomes in the City & County of Denver rose from $279 in June 2016 to $320 this month. That is a 14.7% increase in value, which is surprising, given that the median sold price during that same timeframe increased from $277,250 to $380,500, a 37.2% increase.

During that same period the average price per total square foot of detached single family homes rose from $231 to $271, a 17.3% increase, although the median sold price increased by 20% (from $405,000 to $486,200).

These calculations are for Denver as a whole. There will, of course, be greater or lesser valuation changes in different Denver neighborhoods.  Here are some examples, based on price per total square foot:

Green Valley Ranch – 10.7%

Northeast Denver – 14.9%

Cherry Creek, Hilltop, Montclair – 15.4%

Southeast Denver (Alameda to Evans) – 10.5%

Southeast Denver (south of Evans) – 10.7%

Downtown Denver (to Platte River) – 19.8%

Northwest Denver (Sloans Lake, Highland, Berkeley, Sunnyside) – 18.4%

Golden Triangle  – 9.6%

West Denver (Colfax to 6th Ave. only) – 24.9%

West Denver (6th Ave. to Alameda) – 14.9%

Southwest Denver (Alameda to Jewell) – 24.4%

Southwest Denver (south of Jewell Ave.) – 24.4%

Valuations also can vary based on style. For example, across Denver ranch style (1 story) homes saw an increase in price per total square foot of 19.3%, whereas non-ranch style homes saw an average increase of 13.8%. 

The age of the home can also make a difference. Single family detached homes built before 1990 saw their average PSF values increase by 16.2%, whereas homes built in 1990 or later increased by 11.5%. 

Statistics for Jefferson County:

Using REcolorado (Denver’s MLS) as my source, the average price per total square foot of condos and townhomes in Jefferson County rose from $188 in June 2016 to $232 this month. That is a 23.4% increase in value. Condos increased their value by 21%, and townhomes increased their value by 26.4%.

During that same period the average price per total square foot of detached single family homes rose from $175 to $211, a 20.6% increase.  

These calculations are for Jefferson County as a whole. There will, of course, be greater or lesser valuation changes in every city and in every subdivision.

Here are the increases broken down by city addresses (which can include unincorporated areas):

Arvada – 20.9%

Lakewood – 21.4%

Golden addresses  – 8.8%

Littleton addresses – 13.6%

Wheat Ridge – 24.3%

Evergreen addresses – 10.2%

Smaller cities such as Lakeside and Edgewater did not have a enough sales to produce statistically valid percentages.

Valuations also can vary based on style. For example, ranch style (1 story) homes in Jeffco saw an increase in price per total square foot of 20.7%, whereas 2-story homes saw an increase of 17.3%. 

The age of the home can also make a difference. Single family detached homes built before 1990 saw their average PSF values increase by 18.8%, whereas homes built in 1990 or later increased by 12.7%. 

Conclusion:

All these variations point to only one conclusion — that you need to use the tools provided on the Denver and Jeffco assessors’ web pages (which I’ll explain in a May 2019 column) to determine whether the assessor has valued your home correctly. Last May I challenged the increase on my own home, and, by using the eligible comps listed on the assessor’s website, I received a reduction of nearly $150,000.

Lastly, let me share how the Gallagher Amendment to the state constitution serves to reduce the impact of increased valuations on residential property tax bills.

That amendment fixes the assessment ratio for non-residential property at 29% of the full valuation. For example, if a commercial property has a full valuation of $1 million, the assessed value against which the mill levy is applied is 29% of that amount, or $290,000.  Because that assessment ratio remains fixed at 29%, and because the amendment requires that non-residential property taxes equal 55% of the total property tax revenue statewide, the ratio applied to residential properties keeps dropping from 21% when the Gallagher Amendment took effect in 1982.  Last year, that ratio dropped to 7.2%,  and it is projected to drop to 6.11% next year.  The end result could actually be a reduced assessed valuation even in the face of an increased full valuation.

Let’s say your home was worth $400,000 in 2016, with an assessed value of $28,800 (7.2%). Now your home is worth $500,000, a 25% increase, but if the assessment ratio is reduced to 6.11% as expected, the mill levy will now be applied to an assessed value of $30,550 — an increase of less than 6.1%.  Thus, if the mill levy remains unchanged, your property taxes will increase by only 6.1%, even though your home’s value (as determined by the assessor) increased by 25%.

Moreover, mill levies from many of the different taxing districts keep declining as a result of the Taxpayer Bill of Rights (TABOR) provision of the constitution, so your actual property tax increase in the above example could well be less than 5%.