Given today’s unprecedented stress and uncertainty, multifamily property owners in Marion County, Indiana should explore all avenues that could help reduce their property tax bill. A little due diligence — and some informed advice — can save a lot of money in property taxes.
Marion County has started to mail out property tax bills for the 2019 real property assessments. While property taxes remain due on May 11, 2020, counties have been ordered to waive penalties on payments made before July 10, 2020, due to the COVID-19 pandemic. Property owners have until June 15, 2020 to contest a property’s assessed value by filing a property tax appeal (a Form 130) with the assessor’s office. Initiating an appeal is fairly straightforward. But, determining whether or not your property has been overvalued requires a nuanced understanding of property valuation under Indiana law.
Commercial property assessments across Marion County generally experience small fluctuations in assessed value from one year to the next. However, one particular class of properties, residential-rental property (or multifamily) is experiencing yet another year of large year-over-year increases in assessed value. These properties include real property regularly used to rent or otherwise furnish residential accommodations for periods of 30 days or more, that have more than four rental units. In addition to conventional apartments, multifamily properties can include student housing and senior housing.
Assessment data from Marion County for 2019 indicates that a large number of multifamily properties will incur sizeable increases in assessed values — particularly large conventional apartment properties in the downtown Indianapolis area. These properties have experienced significant increases in assessed value over the last several years as the downtown Indianapolis apartment market has heated up.
After multiple years of large increases in value, prudent property owners should know what tools are available to help address their growing tax burden. Specifically, two important considerations under Indiana law provide important tools in obtaining a fair assessment of commercial real property. First, multifamily properties must be assessed at the lowest of the three approaches to value. Second, assessors bear the burden in an appeal if assessments increase by more than 5%. The trick lies in knowing how to interpret and apply Indiana law in this area.
Lowest of Three Approaches
Several statutes dictate specific approaches to determining taxable value, depending on the type of property at issue. Indiana law requires that multifamily properties be assessed at the lowest valuation determined by applying the three standard approaches to valuation: cost, sales comparison and income approaches. A savvy property owner wants to consider all three approaches in determining whether and how to appeal a lopsided assessment. That is particularly true when the three approaches indicate a wide range of values, which is not uncommon. Owners should not assume that high income levels or a high recent sale price necessarily lead to higher assessments.
Application of this “lowest-of-three” statute can be nuanced. For example, many Indianapolis multifamily properties include ground floor retail or other nonresidential space. Nonresidential space can complicate the analysis. Nonresidential property has a higher potential tax rate (under Indiana’s tax rate caps) and is not subject to the “lowest-of-three” approaches statute. An assessor’s allocation between residential and nonresidential property components may not be accurate, however, such that correcting this allocation provides opportunity to reduce tax exposure.
Indiana law generally presumes that assessments are accurate. Thus, taxpayers typically bear the burden of demonstrating that the assessment is incorrect using market-based evidence. However, Indiana law also provides taxpayers protection against large, unsupported increases in the taxable value of their property.
However, if the assessment of the same property increases by more than 5% from one tax year to the next, the burden shifts under Indiana law. The assessor bears the burden of proving that the assessment is correct (commonly referred to as “the burden-shifting rule”). Application of the burden-shifting rule can be complicated and does not apply to new construction or where property has changed in use. Moreover, as a practical matter, taxpayers should not rely solely on this rule (without other evidence) when contesting a property’s valuation. However, the burden-shifting rule can be an effective tool because it puts the onus on the assessor to prove that the assessed value was both derived correctly and that the value is correct.
As the multifamily market continues to experience large increases in assessed values, owners should remember to survey local laws and make sure that their property is not over-assessed or overtaxed. A property’s purchase price or the value indicated under the income approach may not be a valid proxy for its taxable value. That can be particularly true where the property is older and experiencing advanced depreciation.