This month’s blog is less specific to condominium properties. However, it certainly applies to condos as well. Given the time of year, it is a very relevant conversation. Most Alberta municipalities have mailed out 2021 Tax Assessment Notices as of a few weeks ago. Many homeowners have already received them in the mail.
Breaking down property taxes
Why do property taxes exist? It is an age-old question. Property taxes date back to ancient Egypt, Babylon, Persia, and China and have been utilized throughout the history of modern society. The primary focus of early property taxation was land and its production value. In other words, land was taxed on a percentage of crops grown.
In our current property ownership system, property taxes exist for the same reason ALL taxes exist; governments need money to operate. In order to offer programs, services, and to fund administrative costs, governments need revenue. What they do with that money is…. well, that is a whole separate conversation for another time…
How does it work?
The pressure to have a fair tax system has always existed. It is not enough to have an equitable tax system; the taxpayers need to understand that they are paying their fair share. Whether or not the current system is fair is debatable. However, the rational behind our property tax system is that everyone is taxed at the same rate for residential property within the municipality. The amount you pay is dictated by the value of the assets that you own. Therefore, if you own a Million-Dollar property, you pay a higher amount of property taxes than someone who ones a Four Hundred-Thousand-Dollar property.
Step 1 – Assessment Value
Assessed valuation determines the value of a residence for tax purposes and takes comparable home sales, improvement permits, neighbourhood trends, and inspections into consideration. It is the price placed on a home by the corresponding government municipality to calculate property taxes.
The City of Calgary, like many urban areas, uses a “mass valuation” or “mass appraisal” approach to residential property assessments. This is the process of valuing large numbers of properties as of a given date, using standard methods, employing common data, and allowing for statistical testing. To put this another way, there are too many homes in the city to allow for each to be valued individually. Computer programs apply building costs and depreciation factors calibrated to local market conditions using sales data, by neighborhood, building style, grade of construction, and building condition.
The “assessment value” of the property is therefore less focused on the individual property and more focused on macro influences such as neighbourhood trends and statistics. As an example, after a neighbourhood has existed for 20 years or so, the City of Calgary will assume that all homes within that community have a developed basement. Most likely will. That is a trend. However, the mass approach will apply the value of the developed basement to all homes in the community, even those with unfinished basements. This would be an over-valuation of a property with an unfinished basement and would not be consistent with the market-value of the home… more on that later…
Step 2 – The Mill Rate
The mill rate is the amount of tax payable per dollar of the assessed value of a property. The mill rate is based on “mills” (Latin for Thousandth). It is a figure that represents the amount per $1,000 of the assessed value of the property, which is used to calculate the amount of property tax.
Governments set mill rates based on the total value of property within the municipality. This is done to provide the necessary tax revenue to cover projected expenses in their annual budgets, including things such as infrastructure, police/emergency services, and administration. Once a budget is passed by the local government, known revenues are subtracted, which leaves the deficit to be raised through property taxes. This amount is divided by the value of all property in the municipality, which is then multiplied by 1,000. This figure represents the tax rate or the mill rate.
As an example, the Residential Property mill rate in the City of Calgary was 0.0075223 in 2020. This represents a combination of the Municipal Tax Rate which was 0.0047795 and the Provincial Tax Rate which was set at 0.0027428. At the time of writing, the 2021 mill rate has yet to be established.
Step 3 – The Calculation
Property tax is an ad valorem tax, which means it is based on value. The final step in determining property taxes due and payable by a property owner is simply;
Assessed Value of the Property x Mill Rate (Tax Rate) = Property Taxes Due
As mentioned above, all residential property owners within a jurisdiction or municipality pay the same tax rate. It is the assessed value of the property weighed against the mill rate that determines the final tax amount. This is the element of “fairness”. Property taxes on a One Million-Dollar property would have been $7,522.30 based on the 2020 mill rate in Calgary. Likewise, property taxes on the Four Hundred-Thousand Dollar property would have been $3,008.92. Same tax rate. The difference is the assessed value.
Market Value of Property
We have already established that assessed values for residential property in Calgary are based on a mass valuation technique. As a refresher, the goal of this process is to value property as of a specific date on a massive scale utilizing statistical analysis, common data, and neighbourhood trends.
On the other-hand, Fair Market Value of a property is the price that a property would sell for on the open market under usual conditions. The Comparable Sales method, also known as the “market data” approach, is the most common way to arrive at market value in residential real estate. The recent sales of properties of similar stature are reviewed to inform judgment. Recent sale are compared to the subject property in order to take into account the differences. These differences, or unique characteristics, are taking into consideration and sale prices are adjusted accordingly. This approach operates under the assumption that a “reasonable buyer” will pay more for a property which has additional value. Likewise, that same buyer will pay less for subtracted value. We call this Comparative Market Analysis (CMA). The goal is to determine a reasonable market value for the subject property based on comparative property sales and taking into account their differences.
Unlike the mass valuation technique, the scope of the Comparative Market Analysis is very focused. As an agent, I am not concerned with determining value for the entire neighbourhood, or the entire city. I am specifically focused on the subject property and how it compares to the other recent sales. Earlier in this article I mentioned that the mass valuation technique will apply neighbourhood trends to all of the properties within a certain area. For example, the city will assume all basements are developed. Compare this to the CMA which would take into account the lack of a developed basement and factor that into market value of the property. Afterall, it stands to reason that a buyer will pay more for a property with a developed basement, and less for a property without a basement development. The analysis is a better reflection of property value when this is taken into consideration.
Are Assessed Value and Market Value the same thing?
In a word, no.
I have recently seen some media publications which have added significant confusion to the issue. In short, your tax assessed value is not the same as your market value.
Consider this – the tax assessment notice that you just received in the mail as a property owner “reflects the estimated market value of your property on July 1, 2020 and the characteristics and physical condition as of December 31, 2020”. This statement is taken directly from the assessment notice. In other words, by the time this notice reached your mailbox in early January, 6 months of fluctuation in the market have gone unaccounted for. A lot happens in six months. By the end of 2021, your assessed value will not have changed, however, it will now be 18 mouths ‘behind’ the market.
When I am creating a Comparative Market Analysis for a client either for a purchase, sale, or as part of an Annual Home Investment Review, I am constantly taking market conditions into consideration. Fluctuation in the market, supply-and-demand, and ever-changing regulatory rules all play a significant role in market value.
Reviewing your Assessment Notice
Now, let us make sure we are on the same page. Your assessment notice is important. You should be reviewing it. You should question it. If you have concerns, feel free to contact me. I am always happy to take a look at your assessed value vs your market value. If your market value is higher, it means you are in a good place. Arguably, you are ‘paying less’ than fair market value on the property with respect to your taxes. Alternatively, if you are being assessed significantly higher than market value, you have the ability to challenge the assessed value during the assessment review period. In Calgary, our deadline is March 23, 2021 this year.
How much will you save by challenging the assessed value? It depends. Remember how property taxes are calculated. Having the city reassess your property by $20,000 less will have saved you $150 last year based on the 2020 mill rate. The fee to file a review application is $50. It might not be worth it. However, I have had a client over-assessed by $150,000. We fought it. They were re-assessed and saved a significant amount. Based on the 2020 mill rate it would have amounted to over $1,100…. per year ongoing.
Final Thought…
In a declining market, as we have seen in Calgary and surrounding communities for the past 5 years or so, it is a temping misconception to believe that a drop in your assessed value means a reduction in your property taxes. Logically if your assessed value was $475,000 in 2020 and $450,000 in 2021, it means you are paying less in taxes… right?!? Not so fast. Remember why property taxes exist at all; governments need money to operate. Unless services have been significantly reduced or other revenue streams have stepped in to fill the void, that deficit has to be accounted for. How? The mill rate goes up to accommodate.
“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” — Benjamin Franklin, in a letter to Jean-Baptiste Le Roy, 1789
