Law & Legal & Attorney Tax Law

Annual Rate of Inflation and Values of Property Assessments

    Annual Increases in Market Value

    • Annual increases in a property's assessed market value are limited to a state's inflation rate. Certain states may stipulate that a property's annual assessed value must not increase by more than a certain percentage figure or the inflation rate. For example, the state of California is not able to increase a property's assessed value by more than 2 percent or the current inflation rate, whichever is less. If the inflation rate is 1 percent, then the assessed value will only increase by that amount.

    Changes in Ownership

    • When a property is sold, a new assessment occurs. The increase in the property's assessed value may exceed that of the annual rate of inflation. The taxable value will typically be equal to the property's assessed value in the year following the date of sale. For example, for homes sold in 2009, the taxable values would be determined by assessments completed in 2010. At this point, the state's rate of inflation begins to determine annual increases in the property's value.

    Deflation

    • If the consumer price index falls from one year to the next, this might result in reduced property assessment values. In some states, there is a percentage of change provision that could result in increases or decreases in a property's value. According to the state of California's Proposition 13, "The full value of real property shall be modified to reflect the percentage change in cost of living so long as it is not in excess of two percent." Therefore, if the percentage change between the consumer price index is negative, the assessed property values would be reduced accordingly.

    Declines in Property Value

    • Properties that are reassessed because of a significant decline in market value are not usually subject to the annual rate of inflation increase cap. A property whose market value declines further than its base-year value may experience an increase or decrease by any percentage. The base-year value refers to a property's assessed value at the time of sale. Even if a property is reassessed for a decline in market value, any future assessment increases are not allowed to exceed the base-year value.

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