Rental Property Taxes - You Could be Over Paying

Whether you own one rental property or fifty you should take a hard look at your real estate taxes.  And we are not referring to income taxes but rather the rental property taxes.  Many people are not aware that you can “appeal” these taxes and save hundreds to thousands of dollars per year, per property (or more).

Of the investors that are aware of the rental property tax appeal process many assume it would be too cumbersome in both time and research to bother.  Others are intimidated by debating their city and would rather stay “under the radar.”  Here are a few facts that may make this more interesting for you:

1.        It is estimated by industry experts that 65% of all properties are over assessed (both commercial and residential, owner occupied or investment).

2.       Less than 2% of all property owner’s appeal their taxes.

3.       70% of the 2% that appeal win some type of rental property reduction.

These stats came from the National Tax Payers Union.  The first thing to do, is figure out if your city claims that your property is worth more than it actually is.  Don’t let the city’s jargon throw you off with all of their various terms (Many people believe they do this on purpose).  That is what this is all about, i.e. is your property worth less than what they report it is, and what the tax it off of? 

Rental Property Tax – Assessed Value

Every state and city has an assessed value and an assessment ratio.  The ratios vary from state to state and often from town to town.  Some city assessment ratio equals the actual market value (their opinion of it) with others; it’s a percentage of the market value.  A 2 minute call to your city will determine the answer. 

In our home state of Michigan the Assessment Ratio is 50% in every jurisdiction.  So, if our city claimed the assessed value of a property is $400,000 that means they think the market value of the property is $800,000 (.5/$400,000). 

Say on that same example that we knew three other properties that where similar, that recently sold for $600,000; we would know that the property was being over taxed and would deserve a property tax reduction.  The savings on that example would look like this.

$200,000 (over valued amount) x .50 (the assessment ratio of 50%) = $100,000 over assessed

$100,000 x .052 (our local millage rate for rental properties) = $5,200 of annual real estate tax savings.  

Rental Property Taxes

Note this annual saving normally goes on year after year.  And if you really learn what you are doing or hire someone that does, you can show an over payment in previous years and potentially qualify for a rebate.  For example if you can prove that you over paid $5,000 per year for five years you would technically be owed $25,000 from your city.  Also, note that the annual tax savings has an interesting affect on your net operating income, and actually theatrically increases your properties value by getting the reduction on the rental property tax.  It’s found money.