We have gotten calls from property owners inquiring about how their municipal property tax abatement should work.
The inquiries usually commence with a misunderstanding that an exemption (typically a 100% exemption on improvements for some period of time) means that the owner will never pay taxes on an assessed value for more than that in place at the time the abatement commenced. This is not so.
The Ohio statute that empowers municipalities to provide property tax abatements is Revised Code Section 3735.67.
Section (A) of that statute allows an abatement “of a percentage of the assessed valuation of a new structure, or of the increased assessed valuation of an existing structure after remodeling began.” So, two things there: (a) the assessment is not on the land value and (b) the abatement is not for a specific amount of the cost of the improvements at the time they are built, but “a percentage of the assessed valuation of ” those improvements. Therefore, at the commencement of the abatement, the County Auditor needs to assess the value the improvements added to the property as a percentage of the value of the improvements. And as the abatement period rolls forward, to apply that percentage on the improvement value.
In ensuing triennial reassessments by the County Auditor, he should then calculate separately the value of the land and the value of the improvements for every parcel in the County. As to the abated parcel, that initial percentage attributable to the value of the abatements (as a percentage of the improvement number) should be abated (either at 100% or whatever percentage of the abatement as was initially agreed or granted) The land value along with the new value of the unabated percentage of the improvements would be subject to taxation.
The reason taxpayers are inquiring (or one of the reasons) is that our upwardly-dynamic housing market (and in some cases commercial market) since the COVID pandemic means that over the three-years of the triennial, some neighborhoods are seeing cumulative valuation hikes overall of 50% or more. Even if the abatement is properly included in the tax bill calculations, when compared to the initial pre-abatement valuation, some taxpayers assume “there must have been some mistake” in calculating that abatement. Sometimes there is a mistake, many times there is not — or not enough of a mistake to wade into the adjustment process to make it worthwhile.
It’s fairly easy to calculate the abatement that is due with entirely new construction: If that abatement is 100% of increased improvement valuation for a period of time, during that interval, only the land would be taxes, and even that land value will (may) go up in valuation over time.
But calculating the abatement due to renovations are more complicated.
In the case of a renovation the calculation of what is abated: “it’s complicated.” Imagine a property with an initial $100,000 in land value and $400,000 in building value before the renovation. And to that existing structure, the owner adds a building addition along with a kitchen and two-bathroom do-over. The total improvements to the property cost $200,000.
Three years later, the Auditor makes a new triennial valuation of the property, assessing the land at $250,000, and the building (before abatement) at $750,000, for a total valuation before considering abatement of $1,000,000. What amount of the valuation should be abated?
The proper calculation would consider that the improvements are 33.3% abated ($200,000 of improvements are 33.3% of the $600,000 value of the improvements at the time they were made [$400,000 in initial value + $200,000 of improvements] [these numbers assume these were the correct “value of these respective improvements at that time.]) Thus, the land value is now $250,000 and two-thirds of the improvement value would be $500,000, for a total post-assessment taxable valuation of $750,000.
Now, one client who recently called said “wait a minute, the percentage of increase in the land valuation exceeded the percentage of increase in the building valuation.” From a purely mathematical perspective, that is correct in the foregoing example: 250% increase in land valuation versus a 25% increase in the improvement valuation. I get it. But as we walked thru the land valuation issues given the dynamic marketplace, the land valuation was not wrong.
The County Auditor is charged with independently determining these components of value — it’s one of the prerogatives of the elective office. The taxpayer can challenge these valuations before the County Board of Revision, but the challenge cannot be based upon the relative valuation differences of land versus building. The percentage increases do not need to track one another.
In short, there are three take-aways on Ohio tax abatement valuation questions:
- Do not enter into a tax-abated transaction with the assumption that the taxable valuation will never increase over the term of the abatement period. This is foundationally incorrect.
- Land value for all abated transactions can adjust each triennial for both new construction and renovations.
- Throughout the abatement period, the amount of the unabated improvement portion of a renovation should track the percentage of valuation of the unabated improvements versus the abated work at the time the work was concluded, and that percentage should remain consistent throughout the abatement period.
If you have tax abatement questions, Finney Law Firm team members Eli Krafte-Jacobs (513.797.2853), J. Andrew Gray (513.943.6658) or Casey Jones (513.943.5673) who are each familiar with tax abatement issues.
