At Christmastime each year, one-third of Maryland property owners receive a new real property tax assessment notice. Property owners are advised to review the notice carefully, as a written response is required within 45 days if the value proposed by the Department of Assessments is higher than the owner’s Fair Market Value opinion.
The State’s goal is to determine the “Fair Market Value” (FMV) of each property in an unbiased manner so that everyone pays their fair share of property taxes. To remove politics from the process, the state of Maryland oversees the valuation of property for all counties and local municipalities. Baltimore City and each county are divided into three zones. Each zone is valued once every three years. Any increase is phased in over the ensuing three years. For example, if a property’s old assessment was $500,000 and the new assessment is $800,000, the $300,000 increase is phased in over 3-years. The phasing in process works in such a way that the property is taxed based on $600,000 this year, $700,000 next year, and the full impact of the new assessment is felt in the third year with taxes being paid based on the $800,000 valuation. While completing permits on new construction or a substantial renovation of an existing structure may trigger a new assessment based on the improvements, the sale of a property or modest renovation of an existing property usually do not trigger an immediate new tax assessment.
The Five Phases of Appealing a Property Tax Assessment
Step 1: Determine the FMV
It may not be worth the time, effort, and expense of filing a property tax assessment appeal unless the property owner can demonstrate to the state that the property value is lower than the State’s FMV estimate using one or both of these methods:
- Mistakes on the Property Information: For example, if the State records show that the building area is 8,000 sq.ft. when, in fact, the building is only 5,000 sq.ft., one can argue the property has less value because it is smaller. Other errors include the wrong number of rental units, the wrong lot size, and an inaccurate assessment of the property’s condition. The state may judge your property to be in excellent condition when it may have significant deferred maintenance.
- Fair Market Value: The 3 methods to estimate market value are: (i) Sales Comparison, (ii) income, and (iii) cost.
- Sales Comparison: If a similar property sold for $800,000, in theory, the subject property should also be worth $800,000. Adjustments can be made for variations, such as building size, lot size, and amenities. Per unit, measures are helpful in valuing properties of different size. For example, a 20-unit apartment property selling for $1,600,000 ($80,000 per unit) could be compared to a 10-unit apartment property selling for $800,000 (also $80,000 per unit), since the price-per-unit is the same. If the 20-unit had a monthly rent roll of $20,000 ($240,000 per year), the building would have sold for 6.7 times gross rent (Gross Rent Multiplier or GRM). Applying that same 6.7 GRM to the 10-unit building’s $120,000 annual rent roll results in a fair market value of $800,000 because the GRM would be the same for both properties.
- Income Approach to Value: A property’s value is relational to the net income it generates. A highly profitable property has a higher value than a similar property that generates less income. Since each property is unique in terms of the income it generates and what it costs to operate the building, applying a cap rate to the actual income and expenses is another way to value a property. The state recognizes this method using the most recent 3-year operating history. For the rental income and each expense category, one can take a 3-year average or do a trend analysis, to account for variations or exceptions in any one year.
- Cost Approach: The cost approach theorizes that if it costs $500,000 to build a property and the property sits on land worth $300,000, the property is likely worth $800,000. The cost approach is not particularly useful in older, historic properties.
Step 2: File the appeal, following these steps:
- Sign the back of the Assessment Notice. Be sure to print your name and your title (if the property is held by an LLC or corporation) and include a telephone number.
- Check the box for Option #1, Option #2, or Option #3.
Option #1 is for a written appeal. Write a letter and include supporting information as to why the FMV is lower than the amount determined by the Department of Assessments.
Option #2 schedules a meeting to meet with the tax assessor in-person. At the meeting, you make a personal presentation to the assessor to support your claim for a lower FMV.
Option #3 schedules a telephone hearing where you can speak with the assessor over the telephone and explain why your property value is lower. Assuming you will have documents (comparable sales data, income and expense data, and property condition photos) to present to the assessor, Option #1 or Option #2 may be a better choice than Option #3.
Note: The subject property’s income and expense history must be presented to the Assessment Office in order to argue for a lower value based on the property’s income and expense history.
- Be sure to check both boxes at the bottom of the page so you can receive a copy of the comparable sales data used in valuing your property and a copy of the department’s property information data. Disputing and/or correcting any of this information could be pivotal.
- Keep a copy of everything you send to the assessment office.
- Deliver your appeal notice by verifiable means. Use Certified Mail, Return Receipt Requested, or deliver it in person and get a receipt so you can prove the appeal was delivered before the deadline.