A Once-in-a-Lifetime Opportunity to Reduce a Property’s Taxes: A Supplemental Notice of Value
A successful property tax appeal that reduces the full cash value will also reduce the limited property value in proportion to Arizona’s “Rule B” ratio.
In the next few weeks, county assessors throughout
Arizona will issue supplemental notices of value for the 2018 tax year.
Supplemental notices are issued when there is new construction or
additions, parcel splits or consolidations, or changes to a property’s
use that have occurred since October of the previous year.
Since the tax cap on property valuations went into
effect with Proposition 117 in 2014, many Arizona taxpayers have grown
complacent in monitoring their property’s valuation. If they fail to
carefully review a supplemental notice, taxpayers may miss an
opportunity – possibly a once-in-a-lifetime opportunity – to reduce a
property’s tax liability. The reason: the supplemental notice triggers a
“Rule B” valuation.
“Rule B” Valuation
To understand the effect of a “Rule B” valuation,
let’s take a simple example of a newly constructed commercial building.
Suppose construction of your new building was completed in July 2017.
The county assessor set a full cash value of $4 million to the property.
In Arizona, the full cash value (FCV) is typically synonymous with
market value. This is the easy part.
Just to make things more complicated, Arizona has a
second value known as the “limited property value” (LPV). The LPV is the
value that is most important to taxpayers because property taxes are
calculated only from the LPV. The FCV varies from year to year,
depending on market conditions. By contrast, the LPV is determined by a
statutory formula based on a property’s LPV from the prior tax year, and
it is limited to annual increases of no more than 5%. When a
supplemental notice is issued, Arizona law considers this to be a
first-time valuation of a property, so there is no prior-year valuation
to determine the LPV.
So how does a county assessor determine the LPV for
our new commercial building?
The LPV is established by what is called a “Rule B”
ratio. The “Rule B” ratio is the ratio of the average LPV to the average
FCV for similar properties in the same classification throughout the
county. Rule B ratios vary by county, by class of property, and by tax
year. For example, the “Rule B” ratios in Maricopa County for the 2018
tax year are:
This means, for instance, that in
Maricopa County the average LPV for commercial property is currently 79%
of the average FCV.
Based on Maricopa County’s “Rule B” ratio for our
new commercial building, the LPV would be established at 79% of the full
cash value of $4 million, or $3,160,000. The property’s tax liability
will be calculated solely on the LPV of $3,160,000.
Now that we understand how the FCV and LPV are
determined when a “Rule B” valuation occurs, the question remains why it
represents a once-in-a-lifetime opportunity to reduce a property’s
taxes. The reason is that a successful appeal that reduces the FCV will
also reduce the LPV in proportion to the Rule B ratio. For example, if
our owner appeals the supplemental notice and successfully reduces the
FCV to $3.5 million, the LPV will be set at 79% of the full cash value,
Now let’s see what happens if the owner of our newly
constructed building misses the deadline to appeal the 2018 supplemental
notice. The owner waits until next February 2018 and appeals the 2019
tax year notice. The FCV is again set at $4 million and the LPV will be
set at $3,318,000 (2018 tax year LPV of $3,160,000 x 1.05). The owner
appeals the 2019 valuation and prevails by reducing the FCV to the same
$3.5 million value mentioned above.
In this case, however, there are no tax savings. The
reason is that the appeal did not reduce the LPV. Why? A reduction in
FCV will not, by itself, reduce the LPV. There was no “Rule B” valuation
because the LPV was set in the prior tax year. Unless there is a
reduction in FCV below the current LPV, there will be no reduction in
the LPV and in the property tax paid. This is why a Rule B valuation
represents a once-in-a-lifetime opportunity to reduce a property’s taxes
not only for the current tax year, but for many tax years to come.
Owners that receive a supplemental notice should not
be complacent about challenging their valuation. For taxpayers who want
to appeal their valuation, they have 25 days from the mailing date of
the supplemental notice to file an administrative appeal. All hope is
not lost if a taxpayer misses the 25-day window, as a taxpayer may
initiate a lawsuit in tax court by December 15.