Understanding Property Tax Assessments

Property is a great investment and can be a powerful income stream, but it comes with its own responsibilities. The most onerous, and sometimes the biggest in impact, is property taxes. As you probably know, the Texas Tax Code (Section 23.01) requires the appraisal of taxable property at market value by each January 1st, to file taxes for that past year. “Market value” is defined as the price a property could get, in cash or its equivalent, under the prevailing market conditions.

Purposes of Property Tax Assessment

Most years you assess or have someone assess your property, and that reported value is how your tax is figured. But Section 25.18 of the Texas Tax Code requires each appraisal district to reappraise all its properties at least once every three years.

That process puts you at a higher chance of disagreeing with the appraiser, who may value your property at a higher value than you do. That means you’re paying more in taxes than you think you should. But all is not lost! You can appeal the decision.

Three Approaches to Property Tax Assessment

To put together an appeal properly, it’s best to get the input of a property tax consulting firm like the Hegwood Group. We help you determine the two key pieces of info you’re going to need: the way your assessor is figuring your value (and therefore tax), and which way you should be doing it (to find the lowest value).

If your value is lower than the assessor gave the property, you have standing for an appeal. We call those ways of figuring value approaches. There are three of them, mainly, although every case and property is different. Let’s talk about the three most common approaches to Texas property tax assessments.

Sales Approach to Property Tax

When an assessor uses the sales approach to value your property, they are determining its market value by comparison to similar properties in the area that have sold recently. This is the one that’s easiest to imagine because it’s just like the process of putting your house on the market. You find comparison sales in the neighborhood and price your property accordingly.

This sales comparison approach is typically the method when appraising single-family homes or vacant lots, when that sales information is available, and appealing it is simple: just get your own comparisons for similar properties in your county and see how yours stack up. Look for any discrepancies with your assessment and you’ll have leverage arguing for a lower valuation.

Income Approach to Property Tax

The income approach uses data about income and expenses to determine what future benefits are worth in the present. That is, what an investor would pay now for a property based on its future revenue stream. This approach is most suitable for properties you buy as an income source, like apartments and retail properties, because your value is tied directly to that ability to generate revenue.

Here, the assessor divides the property’s income by the rate of return based on the income the property is expected to generate, or the capitalization rate. What’s tricky about this is that the income could be determined in several ways: by net operating income, effective gross income, operating cash flow, or some other measure of revenue. It’s important to know which they’re using, so you can measure the same way.

This approach is common for properties that make revenue through short- or long-term rentals: hotels, shopping centers, apartment complexes or office buildings. This can get so complicated it requires software to compute. Your property tax assessment appeal should come at this finding through the three ways it’s determined: your income, your expenses and capitalization rate. If any of these is inaccurate, there’s your appeal.

You can also factor in aspects of the property’s condition like the costs of upcoming repairs, or economic factors like the pandemic, which may have interfered with your ability to create revenue as expected. Find out when the district’s appraisal took place and see if things haven’t changed in some way, or are set to change in the coming days. Either way you could be overvalued by your assessor, and that’s good news for your property tax appeal chances.

Cost Approach to Property Tax

Finally, the least common cost approach looks at cost of replacement. The assessor determines the value of the land itself, then adds the cost to replace the buildings and structures, with depreciation taken into account. This method is useful when the property is unique: industrial and warehouses, mining and agricultural facilities, and other special-purpose real estate like that.
A property tax appeal should first look at the way the depreciation was undertaken.

Think here about buildings or structures that are rendered obsolete, by innovations or improvements, but which could still be assessed like they’re major contributors to your bottom line. How much would it cost to replace your building while keeping it at the same utility?

Chances are you know more about the property, and more about its future, than the assessor using this approach.

Choose Hegwood Group for Your Property Valuation

There you have it: three different ways of looking at your property, and up to three different taxable values for that property that could result. Remember, a successful property tax appeal could mean a difference of thousands of dollars. Let the Hegwood Group help guide you through all these approaches to determine the most advantageous in your situation, and start your property tax appeal today.

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