New York City has some of the most valuable real estate in the United States, and generated from those high-assessed property values are large amounts of tax revenue on which the city relies. While the city has a process for how it goes about determining each property’s real estate taxes, property owners may not always agree with the result.
With a new year upon us and the annual assessment period coming up, we are taking a look at both the city’s assessment process and some of the basics to keep in mind when planning for property assessments and challenges.
How is New York City Property Tax Assessed?
The annual assessment is set by the New York City Department of Finance for real estate tax purposes based on the property’s use and condition as of January 5, known as the taxable status date. Once completed, these assessments, known as the tentative assessment roll, are published on January 15 for the tax year beginning on July 1 and ending June 30 of the following calendar year.
The property’s tax class plays an important role in this process, as assessment terms and calculations are applied differently.
- Class 1 – covers residential properties with 1-3 family dwelling units
- Class 2 – includes residential properties with four or more family dwelling units, as well as condos and co-ops
- Class 3 – covers utility properties
- Class 4 – covers any property not included in the other classes, including industrial and commercial properties, as well as hotels and vacant land
There are three valuation methods which the Department of Finance uses to determine the market value of the property.
- The sales approach, based on the selling price of the property, or comparable property.
- The income capitalization approach, based on actual or estimated rental income of the property
- The cost approach, based on the cost of new construction less depreciation
For Class 2 and Class 4 properties, the income capitalization approach is used. The actual income and expenses of the property are reported by the property owner in the Real Property Income and Expense (RPIE) filings and are used to determine the property’s net operating income. However, due to the filing dates of this information (June 1) and when the Department of Finance needs to calculate the property’s value, the data is often not up-to-date and may not reflect the current market conditions of the property.
To determine the actual assessed value, a capitalization rate is applied to the net operating income to arrive at its fair market value. The assessed value would be approximately 45% of the calculated fair market value. Once this assessment has been made, for Class 2 properties with more than 11 units and for Class 4 properties, these assessments are phased in over a five-year period, meaning that only 20% of the current year’s assessed value would be applied each year over the next five years. This is known as the Transitional Assessed Value.
Physical changes to the property though are not transitioned in; rather the full value of the improvements is applied.
Accordingly, there can be two assessed valuations. One is the actual assessment value, which the Department of Finance determines as the property’s value on January 15, and the other is the transitional assessed value, which is the sum of the phase-in amounts for the changes in the actual assessed values from the previous five years. The lower valuation of the two assessment amounts is then multiplied by the tax rate for the respective tax class to determine the real estate tax due.
To illustrate this point, let’s say a property is assessed at $1.2 million for 2021. The actual assessed value to be used to calculate its real estate tax due would be $1.2 million. However, this amount needs to be compared to the transitional value for that period so that the lower of the two valuations can be used. Because transitional assessment amounts are transitioned in over a five-year period, the transitional value for 2021 would be the accumulation of the 20% assessed values from years 2017 through 2020 allocated to 2021. These four years would then be combined together with 20% of 2021’s actual assessed value.
The transitional assessed value is also the reason that in a down-market, such as during the pandemic, where the Department of Finance may grant a reduction in the property’s assessed value, property owners may not see the reduction in their real estate taxes that they expected. This can be because there are still four years’ worth of increases in the property’s value, and the current year’s decrease only makes up 20% of the total transitional assessed value. While the transitional assessed value calculation may help soften the property value increase year over year by transitioning in only 20% of the increase, in a down market, this actually works against the property owner, as the reduction in the property’s value won’t be fully factored in for the next five years, thereby preventing them from feeling the Department of Finance’s acknowledgment of the property’s decrease in value.
How and Why to Challenge an Assessment
Property owners do have the right to challenge an assessment. However, the burden is on them to prove the assessment should be reduced. This process begins by filing an application for correction of the assessed value with the New York City Tax Commission between January 15 and March 1. Class 1 properties are granted an additional two weeks, until March 15, to file this application.
Following this application for correction, a supplemental income and expense schedule, Form TC-201, is required to be filed with the Tax Commission by late March for properties with an assessed value greater than $750,000 to report the income and expenses from the operation of the property. Properties with an assessment value exceeding $5 million are required to have this form audited and accompanied by the Accountant Certification, Form TC-309.
The presentation of this financial information is crucial, and property owners and managers need to work closely with their accountants to make sure this data is prepared properly, as this is an essential step in the process of being recognized for a hearing with the Tax Commission.
Hearings are scheduled starting in April and typically begin with high-value cases. Once those cases are completed, other properties’ cases will be heard, and this will go on for the next several months. If a property owner is not satisfied with the relief offered by the Tax Commission, they have the right to file a petition with the New York State Supreme Court. The deadline for this petition is in late October.
The NYC real estate tax assessment appeals process is full of deadlines and requirements. Having professionals experienced in the laws and familiar with the process on your side is crucial.
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