Taxation of Ccommon Property

In another threat, Mary posted the following

" The only break HOAs have gotten is a break on property taxes for the common areas and this is a very substantial tax break for communities with lots of high-cost amenities. This law allows HOAs to consolidate common area parcels into a single parcel taxed on a value of only $500. You can imagine the tax break if the HOA has a $5 million clubhouse, tennis courts, swimming pools, etc. A tax bill in the tens of thousands might be reduced to less than $10. Proponents of this measure argued that higher taxes on common areas was a form of double taxation."

After the statewide property tax revolt last year (which included the ouster of the Mayor of Indianapolis), Indiana took what may be a novel step, eliminating taxation of common property of homeowner associations. Value of such real estate was subsumed in the valuation of individual units. It was viewed by some as eliminating a form of double taxation, as Mary observed.

Is this practice common in other states?

our common areas are not taxed.

Good observation, but that is not the right analysis.

Indiana went to a fair market value assessment system.

It is very challenging to come up with a fair market value for common elements, since they cannot be sold and cannot be used for anything else. Market value is essentially zero.

For example, what is the fair market value of an 10 foot by 150 foot strip of land that is for access to the lake? It cannot be sold (or even used for anything else), so it has no fair market value.

Similarly, what is the value of a 2 acre detention pond that cannot be sold or used for anything else?

In the past, open space common areas and detention ponds had been assessed at the lowest fallow agricultural rate--in the middle of the city. It was cumbersome and odd.

Instead of separately valuing the common area and amenities,the assessor apportioned the taxes previously paid by the homeowners association to the individual homes. Each homeowner's property taxes went up slightly, and the association property taxes dropped to zero.

It was basically a wash. Tax revenues did not change.

Keep in mind that common property is owned and managed for the benefit of homeowners in a planned unit development. Common area property taxes are assessed based on who benefits, not who owns it. It is a very fair approach approach, I think.

Does all that make sense to you?

I thought I might be confusing, rather than clarifying the issue.

Let me try it again and see if I can get it right this time.

Owners are only taxed only on the fair market value of the property they own, not on property they do not own.

The assessor is essentially saying that the fair market value of individual homes in the community is higher because the rights to enjoy the common areas go with the individual home. Thus the taxes are higher.

In the old system, you still paid the same amount of property taxes, but part of it was collected through your association fee.

And, yes indeed, property can be taxed on something that is not owned. Before the fair market value system was implemented, there was a "view" adjustment that increased the property taxes on a 20th floor condo, relative to an otherwise identical condo on the third floor. A "view" that you did not own was taxed at a higher rate.

That was part of the unfairness of the old system. The new system is based on fair market value, so if the view is not valued by the market, it will not be taxed.

Similarly, if common property is not seen as an amenity worth paying extra for, fair market value drops and the property taxes will decrease.

George,

OK, I gotcha! :-)