Property Tax Assessment

Property taxes are often a heavy burden. A recent decision by the Tax Court of New Jersey can be used to understand property tax assessments and appeals. Property taxes are determined through several factors which are directly proportional to the government’s assessment of one’s property value. It can be important for a property owner to understand the evaluation, assessment, and appeal process to guard against unfair taxation. On May 29th, 2014, the Tax Court handed down a judgment stemming from a challenge to the property value assessment conducted by a New Jersey town. This significantly reduced the Plaintiff’s property assessment conducted by the town, which resulted in lower property taxes for the Plaintiff.

How Property Taxes are Assessed and the appeal process

Property taxes are assessed using various factors. These include the market value of the property you own, the cost of municipal and county programs and services, the costs of your local public schools, the availability of other revenues to cover these costs, the extent of the presence of tax exempt properties in your municipality and the total value of all taxable properties in your area. The State of New Jersey website provides: “The standard measure of property value is "true value" or market value, that is, what a willing, knowledgeable buyer would pay a willing, knowledgeable seller on the open market at a bona fide sale as of the statutory October 1 pretax year assessment date.”

New Jersey and its courts have recognized three methods for estimating property value for tax purposes. The first approach, “The Replacement Cost Approach,” is commonly used for new construction and estimates the cost of creating a building with the same or equivalent utility as a similarly developed property, as nearly as current prices and standards of material and design allow, with a deduction for wear and tear.

The second approach, the “Sales Comparison Approach,” attempts to find market value through comparison of the subject property with similar properties. Factors such as the size of rooms, quality of materials used in construction, location, condition and time of sale are considered.

The third approach, “The Income Approach,” analyzes the future income stream produced by a property to estimate the sum which may be invested to purchase the property in order to receive future benefits.

The assessment process attempts to utilize all three approaches but recognizes that one may be more relevant in certain situations.

Constitutional basis and authority for the assessment of real property is derived from Article VIII, Section 1, paragraph 1 of the New Jersey Constitution. Implementing legislation is found in New Jersey Statutes Annotated (“N.J.S.A.”), Title 54:4-1 et. seq. N.J.S.A. 54-4-1 describes true value as the price at which, in the assessor’s judgment, each parcel of real property “would sell for at a fair and bona fide sale by private contract on October 1 next preceding the date on which the assessor shall complete his assessments.” One may cause a re-evaluation of property by demonstrating that comparable properties in a taxing district are not assessed at the same rate of true value. If one has grounds to assert that the assessment on property is unfair, one may appeal the assessment.

While property taxes themselves may not be appealed, it is possible to appeal the assessment of one’s property. The assessment is a significant factor in the determination of one’s property taxes and is the opinion of a value set by a licensed professional. For an assessment to be considered excessive or discriminatory, it must be proven that the previous assessment of your property does not fairly represent either a) the “True Market Value Standard” or b) the “Common Level Range Standard.”

The “True Market Value Standard” represents the highest price that a property will bring in a competitive and open market under all conditions requisite to a fair sale. Those conditions consist of the following: 1) the buyer and seller are each acting prudently and knowledgeably, 2) assuming the price is not affected by unique stimulus, 3) a motivated and well informed buyer and seller, 4) reasonable time of exposure on the open market, 5) payment made in cash or its equivalent, 6) access to financing and 7) the price represents a normal consideration of the property sold unaffected by external factors such as special financing or special terms.

The “Common Level Range Standard”, meanwhile, refers to the permitted range of an assessment compared to its true value with the allowable amount being either 15% above or 15% below the true value. If the property is assessed at a higher or lower rate than 15% of the true value, then the assessment must be adjusted to its true value.

The Successful Property Assessment Appeal in the Brown v Borough of Bay Head Case

In a recent New Jersey Tax Court case, captioned Brown v. Borough of Bay Head, 2014 WL 2508455 (N.J.Tax), Bruce and Elaine Brown, the owners of a single-family home in Bay Head, New Jersey, appealed their property value assessment. The property was valued at $3.5 million compared with a private assessment the Browns had performed, which concluded that the value should be $2.7 million. In the Bay Head case, the Tax Court began with the principle that “original assessments and judgments of county boards of taxation are entitled to a presumption of validity,” citing to MSGW Real Estate Fund, LLC v Borough of Mountain Lakes, 18 NJ Tax 364, 373 (Tax 1998). As to whether this “presumption” has been overcome, the evidence “must be sufficient to determine the value of the property under appeal, thereby establishing the existence of a debatable question as to the correctness of the assessment.” West Colonial Enters, LLC v City of East Orange, 20 N.J. Tax 576, 579 (Tax 2003). If, in fact, the presumption is overcome with sufficient evidence at the close of trial, then the court must weigh testimony and make a determination of the true value of the assessment while, if the court determines that sufficient evidence has not been produced, then the assessment shall be affirmed.

The Bay Head court discussed an earlier decision, Brown v Borough of Glen Rock, 19 NJ Tax 366, 377 (App.Div.2001), which held that the comparable sales approach is generally accepted as an appropriate method of estimating value for a residence and found that this approach is “the best method for determining the true market value of the plaintiff’s property.” The Bay Head court explained that the comparable sales approach has been defined as a set of procedures in which a value indication is derived by comparing the property being appraised to similar properties that have been sold recently, applying appropriate units of comparison, and making adjustments to the sales prices of the comparable based on the elements of comparison.

A critical issue in the Bay Head case was the drastic difference between the Plaintiff’s expert’s and the municipality’s expert’s valuation of the excess lot on which the Plaintiff’s house sits. As the house sits on two lots, a main point of contention between the parties was that the Plaintiff’s expert deemed this extra lot “excess land”, with a resulting marginal value of $160,000, while the municipality’s expert was of the opinion that the property on which the Plaintiff’s house sits is comprised of two building lots, adding significant value to the property and giving it a valuation of $1.6 million. The municipality’s expert believed that the residence should be valued at replacement value, and that if the house were to be torn down, there would be an opportunity to build two adjacent single-family beach homes on the land. The court ultimately held that the Plaintiff’s evaluation was more credible, as the municipality offered no evidence to support their conclusion that the highest and best use of the property would be to demolish the existing home and permit the construction of two in its place, noting that the home is in good condition and features high-quality amenities.

The court ultimately concluded that the true market value of the property in question was $3 million, which was closer to the Plaintiff’s value of $2.7 million, than that of the municipality valuation of $3.5 million. As N.J.S.A. 54:51A-6a, known as Chapter 123, provides that in a non-re-evaluation year, an assessment must be reduced when the ratio of the assessed value of the property to its true value exceeds the upper limit of the common level range, defined by N.J.S.A. as “plus or minus 15% of the average ratio.” The court proceeded to apply the formula: (Ratio= Assessment ÷ True Value) or (3.5m ÷3m=1.67). Hence, as the assessment exceeded the true value of the property by an amount greater the parameters set by the State, it was necessary for the court to revise the assessment of Brown’s property to its true market value of $3 million, therefore significantly reducing the property taxes.