WHAT EVERY LAWYER SHOULD KNOW ABOUT PROPERTY TAXES

A bi-monthly insider guide to the confusing world of propertytaxation from BRUSNIAK TURNER.

Providing insight and saving lawyers research time and their clients
money since 1981

TAXATION BY GUESSTIMATION

Why Your Property Tax Value Is Wrong!
© John Brusniak 2024

“Pay no attention to that man behind the curtain! The Great Oz has spoken!”
- The Wizard of Oz

SPOILER ALERT! Property tax values are illusory but have real-world consequences. Proposed valuations arrive in the mail in the form of Notices of Appraised Value. They present the assessed amount upon which you or your client will be taxed. (How to tackle property tax phantasms and dragons is the subject of upcoming newsletters.) So, why are these valuations incorrect?

THERE IS NO ANSWER TO WHAT THE CORRECT VALUE OF YOUR PROPERTY IS.

The Texas Tax Code requires all property to be appraised at its market value as of January 1 of each year. But have you ever bought or sold property on New Year's Day? Probably not. The Tax Code calls for a theoretical sale of your property to have occurred under the most ideal conditions. The property must have been listed on the market for “just the right amount of time.” Neither party to the sale can have been under any exigency to buy or sell, and both the buyer and the seller must have been seeking a maximum deal for themselves. And both parties must have been fully aware of all the benefits and deficits of the property. Remember the “reasonable person” rule from law school? Just like that, but on steroids. (Just to be clear—even if you were to have a sale on or near January 1, there is a good chance that either you or the appraisal district will nitpick the terms and circumstances
and claim that the sale does not meet the Code's market value definition.)

LET'S GUESS!

To value your property, the legislature created entities called “appraisal districts.” If you search the meaning of the word “appraisals,” you will find “appraisals” are “estimates.” Wait! Does that mean that your tax bill is based on an “estimate” of what your property is worth? Yes, it does. Imagine for a moment a process in which the federal government, without input from you, estimated your taxable income and billed you for that amount. (While, of course, saying you can come in and explain how their determination could possibly be wrong.) Imagine if the State of Texas did the same thing for a year's worth of sales tax? There is plenty of data out there from which the federal and state governments can generalize and formulate good guesses.

HOW ABOUT YOU USE ONE VALUATION METHOD AND I USE ANOTHER?
The Tax Code recognizes the legal reality you learned in law school: no two pieces of real property are alike. It mandates that you be taxed based upon the “individual characteristics” of your property and that “all available evidence that is specific to the value of your property be taken into account in determining your property's market value.” In the real world, that is called “individual appraisal”–each property is valued separately. But in the property tax world, appraisal districts do not have enough resources to engage in “individual appraisal.” To solve that problem, the Tax Code allows appraisal districts to engage in “mass appraisal.” Under “mass appraisal,” similar properties are grouped together in some fashion such as by location, use, condition, and the like. Data is input into computers and homogenized and applied on a square foot value for each group of properties. Algorithms make further adjustments to try and smooth out wrinkles. For example, when dealing with residential properties, adjustments are made for the number of bedrooms, living space, swimming pools and other differences. It's a good start on thinking what a value might be, but the blending process results in some form of an average. In the end, that means all values are wrong. Some values are too high. Some values are too low. But they are all wrong unless by pure luck the computerized average is an exact fit for your property. In essence, “mass appraisal” is an excellent way to determine values…until you start to ask questions. In theory, you should be able to approach an appraisal district and explain why their “mass appraisal” value is too high by pointing out the individual characteristics of your property. Sometimes that works. But a lot of the time, appraisal districts treat “mass appraisal” valuations as if they were brought down from the holy mountain and carved in stone tablets. They refuse to budge on their numbers. They respond with some version of, “The Great Oz has spoken!”

HOW ABOUT WE ONLY TALK ABOUT LAND VALUE OR IMPROVEMENT VALUE.
That might be a reasonable thing to do. Point out where a valuation error specifically lies. But save your breath—no appraisal district is willing to do that. (It interferes with their internal schedules.) They only discuss overall value. And to be fair, appellate courts agree with them.

THE ROOT OF THIS EVIL.
Funding government operations based on property value dates back to the Assyrians. It became a big deal in medieval England. And it was state of the art in the United States in the mid-1860s. There was only one small problem. No method for valuing property existed. It was not until the late 19th century and early 20th century that attempts were made to construct methods of determining value. Those methods are still in use today. (More on that in future newsletters.) A prominent professor at Columbia University wrote the seminal treatise on valuation in 1937. He concluded that the word “value” has no meaning in and of itself. It only has meaning in context. As a result, “market value” comes with its own set of rules depending on whether it is used for insurance, eminent domain, federal estate taxation, utility regulation, securities work, or property taxation.

HOW DISPARATE CAN VALUATION OPINIONS GET?
A few years ago, I settled the valuation of a corporate campus in January. The negotiations were tough and substantial. Seven months later, the campus sold for 200% more than our agreed settlement value. No one lied. No one did anything wrong. The valuation process doesn't always work or come close. I currently have a case pending where the valuation difference between expert witness reports is 750%. How solid can valuation methods be
when two serious, competent experts can disagree by that amount?

BUSINESS PERSONAL PROPERTY VALUE IS DETACHED FROM REALITY.
There is a lot of available market data when it comes to real property transactions. Not so when it comes to personal property. As explained in the previous two newsletters, appraisal districts categorize and group personal property by use. They rely on depreciation tables which never reach a zero value. They refuse to deviate from them. Those tables bear no relationship to reality, so if you want to dispute them you better come armed with lots of
serious data.

A DIFFERENT WAY TO AVOID PAYING TOO MUCH.
Even if an appraisal district's value for your property seems appropriate or might even appear low, you should not stop your inquiry. The Texas Constitution requires property taxation to be “equal and uniform.” Look at the tax values of your neighbors' homes or the tax values of your business competitors' properties. Are they being taxed at a lower value than your property? If so, you may be entitled to have your taxable value decreased.

WHAT DOES THIS ALL MEAN FOR YOU?
It means that, unless you enjoy overpaying taxes, you should protest the value of your property and your clients' properties. Remember, appraisal district values can't be right. Not because of any intentional wrongdoing, but due to serious, incurable, and fundamental structural flaws.

COMING UP NEXT:
How to Protest