Imagine, if you will, Tinyville, a community of only ten houses. All ten houses were the same size and style, built at the same time on similarly-sized lots, using similar architectural drawings and building materials, each with comparable views and amenities, De Online Assessment tool and each sold to its initial owner for the same price, $250,000. Assuming the fair market value of each of these houses was $250,000, (because after a reasonable amount of time that’s the price at which the sellers and buyers had meetings of the minds, neither being under duress,) Tinyville’s tax assessor valued each property at $250,000, resulting in an underlying total property value of $2.5M for all of Tinyville.

For years, everyone is happy in Tinyville. The families each have kids in Tinyville’s schools, they march in Tinyville’s parades, and compete in Tinyville’s pie-eating contests. In the natural course of events, two of the original families were more prosperous than others and moved into better digs in Mediumville, one retired to Southville, one got transferred to his company’s office in Westville, and one died in a tragic car accident, but their heirs in Bigville didn’t want to move back to their family homestead. Anyway, five of the homes went on the market and because the market had been doing well for the past several years, four were sold for $300,000… except the one belonging to the heirs of the deceased couple – they let the house fall into disrepair, stopped mowing the lawn, and eventually squatters moved in and started trashing the place. When they finally sold it as a “handyman special,” they got $150,000 for it.

Before any year’s tax assessment becomes “final,” it is sent to each homeowner to review. Each homeowner has an opportunity to dispute the assessment. The five original homeowners continued to be assessed at a rate commensurate with their $250,000 property value, and knowing that many of their neighbors sold their comparable homes for $300,000, they silently accepted this assessment. The four new owners who paid $300,000 each are also assessed at $250,000. Strangely, it is illegal for a municipality to perform a “spot assessment” of individual properties so although the “fair market value” of those four homes has increased by 20% since last appraised, they continue to be assessed at $250,000 each. The tenth home, purchased by the handyman for $150,000, is also assessed at $250,000, but he disputes his assessment. He argues that the fair market value of his home should be based on his recent purchase price, and through the various legal methods at his disposal, he has the house reassessed at $150,000.

Assuming the total tax levy is unchanged at $100,000, what happens to each homeowner’s property taxes? Nine of the ten houses are still assessed at $250,000 each, but the last is now assessed at only $150,000. One might quickly (and incorrectly) guess that the houses with unchanged assessed values would have no change in their $10,000 property tax bill, and that the tenth house would pay just $6,000, but that doesn’t add up correctly; Tinyville needs to collect $100,000 in taxes to balance its budget, and this formula only adds up to $96,000. What actually happens is that the denominator changes, too. Tinyville’s total assessed property value is recalculated based on each property’s assessed value, and now adds up to just $2.4M. That means that each of the $250,000 houses now accounts for just over 10.4% of the total, and is now responsible for that percentage of the $100,000 levy, increasing each of their assessments to $10,417. The handyman’s $150,000 assessed value accounts for 6.25% of the total, so he’s now responsible for just $6,250 of Tinyville’s tax levy.

Some (including the handyman) would argue that the handyman’s house is worth less, and consequently, he should pay less tax than his neighbors. Others (including his neighbors) would argue that his house is the same size and shape, takes up as much land, and places the same demand on Tinyville’s police, fire, schools, libraries, sewers, and other services, and that he should pay the same amount as the other houses. Some (including the original five families) would argue that the resold houses should be assessed at their new, higher market values, and that the new owners should pay proportionally more taxes. Others (including the four new owners) would argue that the fair market values of their homes (as evidenced by their sale prices) are indicative of the actual fair market value of the five unsold homes, despite the fact that those homes haven’t recently changed hands. These are the sort of issues that confound homeowners and plague tax assessors, assessment review boards, and courts in every municipality, every year.

In a perfect world, when the handyman files for building permits to repair and restore his home’s value, the new value he creates by the work he does should bring his tax assessment back in line with the other comparable houses, thereby reducing his neighbors’ percentage of the total tax, accordingly. Unfortunately, not everyone applies for building permits, and not every project even requires building permits. Upgrading your kitchen appliances improves the value of your home without requiring building permits. Many municipalities don’t require a building permit to add a new layer to your roof or to retile your bathrooms. Of course, there are also homeowners who build bedrooms in attics or lofts over their garages without permits, and not every new home buyer is savvy enough to realize that they are paying for such unpermitted improvements. If you complain to the tax assessor that your neighbor has an unpermitted finished basement, the tax assessor doesn’t have the same authority as a building inspector to knock and demand to see that basement so as to tax them appropriately… and not every building department inspector is willing to perform inspections on an anonymous tip, so you may have to go on record as the guy who ratted out his neighbor. Consequently, a lot of home improvements are not reflected on the tax assessment rolls.