Paula Chin in Legal/Financial on March 15, 2021
When property values go down, it’s only natural to expect your property taxes to go down as well. But when New York City’s Department of Finance (DOF) sent out its tax assessment notices on Jan. 15 for the upcoming 2021-22 fiscal year, many co-op boards were in for an unpleasant surprise: Despite declines in the market value of their properties, their property taxes are going up.
Even given the city’s endlessly confusing property tax system, the numbers just don’t seem to compute. First, because the DOF isn’t working with current data – there’s a time lag of two years – its determination of market rates is somewhat arbitrary. But a more important reason for the disconnect is something that’s buried in your annual property tax bill. It’s called Transitional Assessed Value. Simply put, a fraction of the increase or decrease in a building’s assessed value from the previous year is factored into its assessed value for the current year; the assessed value for any given year also reflects the five previous years of ups and downs. In an up market, it’s possible that this Transitional Assessed Value will increase for five consecutive years. Because of that five-year spread, any decrease in market value – that is, replacing just one of those yearly jumps with a minus charge – won’t be immediately reflected in your current tax bill.
Bottom line: Don’t assume you’ll catch a break in 2021-22 because of the 2020 downmarket. “There are going to be situations where the DOF will say, ‘Look, we dropped your actual assessed value by a million dollars,’ ” says Paul Korngold, a partner at the law firm Korngold Powers. “And people are going to think, ‘Well, my taxes are going down.’ But you’re not likely to get that full million-dollar reduction. And in many cases, buildings that get a reduction in their market values may still end up paying more in real estate taxes.”
For Class 2 residential properties – which includes co-ops and condominiums – with 11 units or more, a byzantine formula is used to arrive at your property tax bill. The first step is determining market value. Because co-ops are considered rental buildings, their market value is determined by their income-earning potential based on similar rental properties. Second, multiply market value by 45% to arrive at your actual assessed value. Step 3, however, is where the calculations get tricky. The law mandates phasing in 20% of the change in your assessed value each year over a five-year period, which yields your Transitional Assessed Value. Whichever is lower, the assessed value or the transitional value (minus exemptions), is your building’s taxable value. Finally, multiply that amount times the tax rate to get your property tax bill.
The Transitional Assessed Value system, which dates back to 1983, benefits building owners in an upmarket by essentially evening out five years of normal market gains, thereby lessening the tax pinch when actual assessed values keep rising. If increases take place year over year, only 20% of those increases are felt in any given year. And because transitional value phase-ins are just one-fifth of assessment increases, the transition will usually lag behind assessed value, Korngold says, adding, “People are all too happy to pay on it, since it’s almost always less than the assessed value.”
All that, however, is turned on its head when property values decline, as they have during the pandemic. “Even if your assessed value suddenly drops, you may still be getting an increase in your Transitional Assessed Value because that amount just keeps accumulating from the previous years when your actual assessed value was higher,” Korngold says. In other words, there would have to be a significant drop in property values in any given year to offset the multiple transitional assessment phase-ins that have already gotten baked into your annual tax bill. “The system,” Korngold says, “is very cruel in a downmarket.”
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