An appraisal is designed for everyone involved to make a more informed decision. Whether that’s a buyer, a seller, a lending institution, or even the IRS, you all want the same thing.
Local governments earn money on each piece of real estate for which property owners pay taxes. That number isn’t just randomly generated, though. It is established using valuations and analysis of fair market conditions of the property’s worth.
Property appraisal reports are crucial for tax purposes and are conducted to determine what a property is worth. That valuation is then used to establish an owner’s property taxes. The more you know about the real property value, the less likely you are to be surprised by your property tax bill.
Government tax assessors are the ones responsible for procuring a valuation for property tax purposes. It’s these values that your local government uses to determine your annual property taxes.
Property appraisals can also be used in a myriad of other ways. Consider someone donating a property to charity. How they write that off for their tax deductions is determined by the real estate’s appraised value.
More than tax deductions and estate tax purposes, you may also need an appraisal when writing a will. To conduct or complete a probate process, every aspect of a will is under scrutiny. This often involves property appraisals and the valuation of personal property.
These are just a few examples of how a property appraisal can help you. Legal hurdles, inheritance matters, and tax assessments all require property appraisals.
It can be overwhelming, especially when the IRS and tax rates are involved, but it doesn’t have to be. Reading on, you’ll learn all about the appraised value of a property, why you may need one, and how that report will affect you come tax season. The more you know about this seemingly convoluted process, the more confident you’ll be when you have to face it yourself.
The Appraised Value of a property
A property’s worth is determined by market conditions, the existing or upside income potential of a property and the interactions of buyers and sellers. Property appraisers are frequently requested to help in estimating a property's market value. The result of this appraisal analysis affects a property’s selling price and, to a degree, what the owners are willing to accept from a seller.
A property’s appraised value is determined by a confluence of factors. Real estate appraisers take all these variables into account:
- Type of property
- Market conditions
- Comparable property values
- The property itself
- Gross and net income potential
All those factors are taken into consideration by an independent appraiser. Whether hired by the lender, the owner, or a potential buyer, an appraiser considers all these components to establish the true value.
A buyer may order their own appraisal report if they are putting in an offer on a property. Because of demand, the market, or a suspect value on a house, a lending institution or the buyers themselves may want to have an independent appraisal done to confirm the value of the property.
Qualified appraisals represent a report of all these factors including the market’s current impact on the valuation of the property. The market itself has the most impact, considering that an influencing factor in the appraisal is comparable properties.
Similar properties and their appraised value are incredibly influential in an appraisal report. A difference of a few months can sway the market one way or another, causing housing prices to rise or plummet, impacting your property’s appraised value.
As such, an appraisal’s effective date is important to take into consideration. An appraisal done too early or too late in the buying or selling process can be rendered obsolete in turbulent markets.
Why obtain an appraisal?
A property appraisal is valuable to just more than a buyer or a seller. Lending institutions demand them before they issue mortgages, the IRS requires them for property donations to charitable institutions, and you’ll need it before distributing property from a decedent's estate.
Here are just a few examples of why you may find yourself in need of a property appraisal.
- Property Valuations
A property’s worth is not dependent on what the previous owner paid for it or how much they hope to get when they sell. Those aspects are too subjective and are at the mercy of other factors like demand and inflation. Setting a price for a property requires a property appraisal which uses data and objective valuation tactics to determine the property’s value.
An appraisal is procured to set the asking price of a property initially. Once the property is on the market and a buyer has issued an offer, their lending institution will request an independent appraisal to be sure the price agreed upon reflects the appraised value.
Appraisals are not just performed when buying or selling a property. If a property owner is attempting to refinance their mortgage, the financial institution may require a current appraisal report when renegotiating the mortgage.
- Tax Certiorari
When attempting to cut down on expenses, instead of changing the mortgage, a property owner may opt to renegotiate their property taxes. These taxes are the funds property owners pay to local governments in order to maintain their property. These taxes are produced on an ad valorem basis, meaning that they are based on the value of the property.
Unless another appraisal is performed, the property taxes are based on the most recent appraisal conducted by the assessor. To dispute that valuation by a tax authority, a property owner can enter into the tax certiorari process, which is how they go about changing the valuation that determines their property taxes.
- Estates
If you are the beneficiary of an estate that has property within it, an appraisal is a necessary step to protect your interests. If real estate (or its value) is divided amongst beneficiaries, if real estate is bequeathed as a gift, or you are listing real estate that you have inherited - you will benefit from a property appraisal. That appraisal impacts the estate tax return you may have to file as a beneficiary.
If you are the executor of a decedent’s estate, you must obtain a date of death appraisal that assesses the market value of the real estate holdings of an estate. The date of the appraisal must be conducted within six months of the decedent’s death.
How an Appraisal Can Impact Your Taxes
The appraisal conducted during the buying and selling process is a completely independent process from your subsequent property taxation. It’s done completely separate from tax assessors in an appraisal district that determines property taxes.
You can undergo the tax certiorari process to dispute the county’s assessed valuation of your property. Short of that, an appraisal has little impact on your property taxes.
That being said, an appraisal can help you in other tax aspects. For instance, if you’re making a charitable donation that you wish to deduct, a property valuation is necessary. Any non-monetary donation that exceeds $5,000 must be supported by an appraisal.
If you’re the beneficiary of an estate or entering into real estate planning, taxes are of enormous influence when it comes to your inheritance or those who stand to inherit from your estate.
The Appraisal Process
The appraisal is conducted by an independent appraiser. If a financial institution has ordered the appraisal, they’ll most likely have a relationship with an appraisal service. However, if you’re requesting it yourself and searching for an appraisal service, consider what kind of appraiser you need.
A qualified appraiser should be licensed and experienced in the property’s state. Other than their state-required licenses, you can see what other licenses and certifications they have to indicate their exemplary performance and experience.
They must be impartial and there are definitely better appraisers than others. Ask for sample reports, what kind of data they use, their turnaround time, and cost when considering appraisal firms or independent appraisers.
A property appraisal can take anywhere from a few days to a month, depending on the market and the type of property, the volume of work an appraisal company has at the time of the order, and the level of 21st-century sophistication and efficiency the appraisal company possesses. The timeline can differ drastically between commercial and residential real estate because of a variety of factors.
If it’s a commercial property in question, an appraiser has to develop an income approach to consider all the income-generating ramifications of a property. A property’s production of income is crucial when considering its current and future value.
This approach also takes into consideration any potential losses incurred from the property (vacancy, collection loss, and expenses) to turn its income generation into a monetary value.
A single-family residential property won’t have income generation taken into consideration and will be most influenced by comparable historic property sales. The same generally holds true for 2-4 family dwellings, which are income-producing, but whose value is highly influenced by owner-users who frequently occupy these property types. A market value is then established by the logic that if one property owner is willing to pay a certain price for a similar property, someone else will pay the same price for a comparable property.
Fair market value frequently doesn’t align with the assessed value of the property. They can diverge because of external circumstances - for instance, a buyer may want a house and be willing to pay more than the assessed value for it. Or an owner may be desperate to sell and take less than the assessed value - these are a few reasons why appraisers consider more than past data on the property to generate an appraisal. There are other factors that can cause a divergence in value between the assessed value and the market value which include:
Timing: The assessed value of a property may be determined at a different time than the
market value. For example, the assessed value may be based on the property's value at a
specific point in time, while the market value may have changed since then due to factors
such as changes in the local real estate market or the condition of the property.
Property condition: The assessed value may not reflect the current condition of the property.
A property that has undergone recent renovations or improvements may have a higher
market value than its assessed value.
Location: The location of a property can have a significant impact on its market value. Factors such as proximity to schools, shopping centers, and public transportation can increase the market value of a property, while a less desirable location may lower its value.
Demand: The assessed value of a property does not take into account the current demand for
properties in the area. If there is high demand for properties in the area, the market value
may be higher than the assessed value.
Unique characteristics: A property with unique or special features that are not reflected in the
assessed value may have a higher market value. For example, a property with a large
backyard, a swimming pool, or a view may be worth more on the open market than its
assessed value suggests.
Market conditions: The local real estate market can have a significant impact on the market
value of a property. During a seller's market, where demand for properties is high and supply
is low, properties may sell for more than their assessed value. During a buyer's market, where
there are more properties for sale than buyers, properties may sell for less than their assessed
value.
The appraisal considers both the market conditions and the property itself to establish its value. Market conditions are determined by supply and demand, the volatility of the market, and interest rates in the market.
As far as the property itself is concerned, its amenities, square footage, and even the neighborhood are all considered when generating an appraisal report. Those features are then compared to other properties to draw up an estimated value.
After the Appraisal
Once the appraisal is conducted, the appraiser generates an appraisal report. This document will compile all the historic data on the property, its renovations, square footage, and other information along with pictures of the property.
Also included will be the data on the comparable properties, including their sale prices. If the
subject property is income-producing, an analysis of both the property’s income and expenses
are analyzed and compared to market rents and expenses to determine a market-reflective projected net operating income, assuming competent and arms-length management. This estimate of net operating income is then converted into an estimate of market value by applying the capitalization process. The capitalization process involves two primary steps:
A) Determining the Net Operating Income (NOI) of the property: The NOI is the income
generated by the property after deducting all operating expenses but before deducting
any financing costs. This is typically calculated by taking the property's gross income and
subtracting all operating expenses, such as property taxes, insurance, maintenance, and
management fees.
B) Applying a capitalization rate to the NOI: The capitalization rate (cap rate) is a percentage
used to convert the income generated by the property into an estimate of its value. It
represents the rate of return an investor would expect to receive on their investment in
the property. The cap rate is determined by analyzing similar properties in the market and
taking into account factors such as the property's location, condition, and potential for
future income growth.
To calculate the estimated value of the property, the NOI is divided by the cap rate. For
example, if the NOI is $100,000 and the cap rate is 8%, the estimated value of the property
would be $1,250,000 ($100,000 / 0.08).
The capitalization process is commonly used to value commercial real estate properties, such
as office buildings, shopping centers, and apartment buildings. It provides a standardized
method for estimating the value of income-producing properties and allows for easy
comparison of different properties in the market.
This data is important to demonstrate the market price of the valuation, lending credence to the appraisal report’s findings.
After the appraisal is conducted, it will not impact your property taxes unless you are planning to undergo the tax certiorari process, which is required in states like New York, but not in states such as Florida (please contact your local appraisal expert and inquire about the tax reduction process in your state of residency or investment). Tax certiorari is a legal proceeding used to challenge the assessed value of a property for tax purposes. It is a process through which property owners can seek to reduce their property tax liability by demonstrating that their property has been overvalued by the taxing authority, such as a local government or school district.
The tax certiorari process typically involves filing a petition or complaint with the appropriate
court or administrative agency. The property owner or their representative will then present
evidence to support their claim that the property has been overvalued, such as recent sales of
comparable properties, property appraisals, and income and expense statements for income-
producing properties.
The local taxing authority will also have an opportunity to present evidence to support the assessed value of the property. The court or administrative agency will then make a determination based on the evidence presented and may adjust the assessed value of the property accordingly.
If the property owner is successful in reducing the assessed value of their property, their
property tax liability will be lowered, resulting in a reduction in their property tax bill. The tax
certiorari process can be time-consuming and expensive, but it can be a valuable tool for
property owners who believe their property has been overvalued for tax purposes. In states
where tax certiorari is mandated, this involves more than just a few forms and signatures.
You’ll need:
- Petition filed disputing the current valuation
- An opposing appraisal report or valuations on comparable properties
- Retaining an experienced attorney to navigate the process
You also need grounds to file the petition in the first place. The only accepted grounds are excessive assessment, unequal assessment, unlawful assessment, or misclassified assessment. These are the only grounds on which a petitioner can even enter into a tax certiorari process.
An appraisal can also impact the selling price of a property. It can also change what a buyer is willing to pay. For instance, if the valuation is drastically different from the asking price, they can leverage it to lower the asking price. Especially since the lending institution will not lend more than the market value of the property.
Start Your Appraisal Now
Whether you’re the beneficiary of an estate and you’re trying to determine your next steps or you’re trying to lower your property taxes, an appraisal can seem like a daunting task.
An appraisal is designed for everyone involved to make a more informed decision. Whether that’s a buyer, a seller, a lending institution, or even the IRS, you all want the same thing. Accuracy, factual detail, and reliability are all crucial characteristics to look for in an appraiser and you’ll find them in WestRock.
Equipped with information and WestRock at your side to answer all your questions, you’re on your way to having an appraisal for your tax purposes. Simply fill out the form and reach out to WestRock today to schedule a free consultation and see how we can help you.
