HOW THE PROPERTY TAX SYSTEM IS HARMING MARKETS LIKE NEW YORK

Property taxes are typically the largest expense real estate owners face annually. This stands true both for single-family homeowners, commercial developers and investors whose property taxes take up an even larger share of their expenses. Though not federally mandated, all 50 states have property taxes in some form and the rate is primarily determined and collected by local governments.

of value. Florida is close to the midpoint with an average rate of 0.89% of value, and Hawaii is the most affordable with homes being taxed at just 0.28% of value. It's important to note that both New Jersey and Hawaii have state income tax rates north of 10% while Florida has no state income tax.

Ran Eliasaf Founder Northwind Group

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Understanding how property tax is calculated and why it varies by location is at the top of real estate owners, operators and buyers’ minds. This is especially true when property valuations are showing signs of decreasing after the past few years of rapid growth.

In their simplest form, property taxes are taken as a percentage of a buildings’ assessed value. However, how this rate and value are determined varies by state and by county. Furthermore, several tax breaks, write-offs, abatements and additional tax exemptions and incentives — which vary by county — complicate the property tax structure. These tax breaks are used by policymakers to incentivize certain activities such as home ownership or the construction of certain needed asset classes

Understanding a county’s tax incentives, how different property types are valued and the different tax rates that are applied are some of the most important pieces in assessing if a certain market may be favorable or unfavorable for real estate owners and investors.

According to a recent study, New Jersey has the highest property tax rate on singlefamily homes, with an average rate of 2.49%

In most states, different property asset classes are valued and taxed in various ways. New York City properties are split into four classes: class 1 (one to three-unit residential properties), class 2 (residential properties with more than three units), class 3 (utility properties) and class 4 (all other commercial and industrial properties). This system can negatively impact owners and developers of smaller residential buildings, who fall into the same tax class as the owners of massive skyscrapers.

Taxes generally increase when the market is doing well, and valuations are increasing. But given the risk of recession in 2023 and the slowdown we have seen thus far in the housing market, it’s important to also consider how different states treat valuations in a bear market. There is generally a one- to two-year lag between the market value of properties and the taxes owners are paying on them. However, some states are better at keeping up with the market due to the frequency of property assessments.

Now that values may be going in a negative direction, states which conduct property audits on an annual basis rather than going multiple years between assessments will be more favorable to owners.