Jon Anderson: Tax Dodging and The Black Hole of Property Tax Valuations

Courtesy of PhotoBucket

Courtesy of PhotoBucket

Get caught up and read part one of Jon Anderson’s Property Tax series here.

Tax Dodging 101

Every Realtor I have asked has completely agreed with this statement, “The more expensive a home, the less accurate DCAD’s valuations are.”  The translation here is that the wealthier you are, the more able you are to pay taxes but the less likely you are to be paying your share.

And why not cheat?  We read almost daily of some large corporation relocating to Ireland to dodge taxes in what’s called a “Double Irish With A Dutch Sandwich” or the likes of Google’s outrageous UK deal to settle a ten-year tax dispute for a measly £130 million based on profits of £7.2 billion. Why not the little guy too?

We have become a society where given a choice, too many will take a shortcut when offered.

There are three components that abet property tax shortcuts.

  1. Non-disclosure
  2. DCAD inefficiency
  3. Tax challenges

Non-disclosure completely masks the actual price paid for a property.  Depending on whom you believe, DCAD may or may not have visibility into MLS data.  In years past, the MLS removed selling prices from their database and marked those transactions with a “Z.”  A “Z” designation essentially meant that the price paid was more than DCAD’s valuation.  Since the “Z” has been banned, we’re now seeing multi-million dollar homes listed on the MLS until a handshake agreement is in place.  That listing is then removed from the MLS and the transaction handled privately.  The other trick is to purchase via a private sale or a hip-pocket listing.  Some high-rises seem to never have units on the MLS but there’s a hopping market in private sales that is unearthed if you look at ownership records.  The net result of all these tactics is to keep DCAD in the dark to keep taxes low.

DCAD is inefficient because of staffing issues endemic to many government agencies and … well … laziness.  In the hottest market in decades, some properties are being reassessed every year while others, in hopping areas of town, still retain years’ old valuations.  Would you believe three of 24 Mansion Residences are worth less today than in 1999?  One unit, the 11th floor, a whole floor unit is worth just $200,000 more than in 1999, while several have more than tripled in value.  Equally odd is that the valuation for the tony Turtle Creek dirt under the building hasn’t budged a dime since 2010 when it  dropped 33 percent. (I’m not picking on the Mansion. It’s just that with 24 units, it’s a quicker comparison than say the Renaissance’s 600 units, which in their price point are likely assessed closer to reality anyway.)

I could just as easily look at The Warrington’s current listings to see wildly skewed valuations.  Unit 3C is listed for $775,000, but valued by DCAD for just $366,520 after a 2015 ownership change, but no valuation change since 2012 (in a blazing Turtle Creek market).  While 3C may be the result of massive investment and flip that DCAD hasn’t caught up with, the same can’t be said for unit 18E.  It’s currently listed for $1.25 million yet valued by DCAD for a paltry $519,080 since 2012. And going back further, the current owner purchased the property in 2005 when the property was valued at $493,730, or a 4 percent increase over a decade.  While both have been obviously renovated, DCAD appears to have no record of any work being done listing each as “average.”

Finally, challenging your tax valuation, while open to all property owners (I’ve done it), is a sport largely taken up by the wealthy.  Certainly flipping through DCAD there is an inordinate number of “Tax Agent” listings on higher-priced properties. Regular people don’t challenge as often or as professionally and, I assume, as successfully.

The Hollow Argument: Privacy

When you read about states considering a move to disclosure, the privacy argument is the Holy Grail.  You see, these people say, neighbors knowing what each paid for a home is a violation of privacy.  If anyone (gasp) could search online and find out how much a home sold for, all hell would apparently break loose.  One wonders if they’re  referring to the same hell that doesn’t break loose in the remaining 35 states who do disclose?

In largely urban, suburban, exurban areas, “like” is built next to “like.”  A million-dollar home isn’t built next to a shack nor does a condominium complex/high-rise contain both $100,000 and $1,000,000 units. Modern housing developments build homes in a tight range of a few tens of thousands of dollars. No secrets there. In fact, if what a homeowner wanted was actual privacy, it’s their publicly recorded ownership they’d be more rightly ticked about, not the financials.

I mean, is it more of an invasion of privacy for the world to know that the new Mrs. Rupert Murdoch, Jerry Hall, has owned three minor-league investment condos in Dallas at Turtle Creek North, Greenbrier Place and 4419 Holland Avenue since 2011/2012 … OR that the properties are valued at $188,270, $67,450 and $120,580 respectively and that Turtle Creek North has only increased in value by $20 since 2012 while in our HOT market the Holland property dropped $1,120 in 2015 since it was last reassessed in 2009?

Devoid of ownership details, the rest is just numbers.

A corollary to this involves ranch and agriculture lands.  This argument says that if vast parcels of land were assessed at their true tax rate, they wouldn’t be worth farming or ranching.  Let’s step back from this one.  Currently in the US, it’s estimated that two-percent of the population is engaged in farming and ranching, down from nearly half in the early 1900s.  Farming today is large-scale, industrial and big business. It’s not Henry Fonda driving to California in the Grapes of Wrath.  Eighty-nine percent of US farmland is family-owned, but likely under contract to large corporate entities like Tyson, Minute Maid, and General Mills.

And again, if the land was properly assessed and found to be overtaxed based on crop or livestock potential yields, then lower the rate of taxation.  If the actual value is public, then there can be public discourse on taxation rates.  As it stands now, these undervalued properties are just hoping their local appraisal district never wises up to the true value of their holdings.  That’s no way to live.

After part one of this pair, a reader wrote to me personally with all the pat phrases railing against big government, invasion of privacy, and questioning my intelligence.  What occurred to me after I replied was to wonder how many credit and loyalty cards he had. Clearly as a society we don’t mind business knowing the penny-by-penny details of our lives as long as we get “1 percent cash back” and targeted coupons at checkout for our favorite cat food.

Is that the answer?  Should DCAD have a loyalty program to blind us to their evil desire for accuracy?

The Commercial Black Hole

One thing I haven’t touched on, and it’s huge, is commercial property.  Talk about a complete black hole. Almost everything is private.  Even if DCAD could access it, there’s no commercial MLS to centralize data. As a result, the commercial contribution to overall tax revenues is almost certainly the most inaccurate and results in the lowest ratios of market value to DCAD valuation.  If commercial property was taxed accurately, residential tax rates would likely plummet.

Like all taxation, what was skewed towards business in decades past has slowly been transferred to consumers. Why is consumer spending the bellwether of the economy?  Because we, not business, pay the lion’s share of taxes.

Summary

In the end, having a complete picture will make for more accurate taxes and rates that are more fair on the majority of homeowners.  Who wants to live waiting for the DCAD shoe to drop?

The State of Texas and our Metroplex are being robbed of needed tax revenues to better our schools and infrastructure. The reason for this is because Texas clings to an outdated tax code that doesn’t require property sale prices to be publicly recorded. Because of DCAD’s inaccuracy with higher-priced property, supporting non-disclosure is especially deplorable as it unfairly enriches those who are most able to pay their fair share.

If property valuations were more accurate, municipalities could decide on proper taxation rates.  I suspect if valuations were accurate, the coffers would overflow and result in overall taxation rate reductions that would save those owners who are most accurately taxed today. After all, Texas voted to lower rates last year even with the current level of inaccuracy.

It’s also worth noting that if non-disclosure was erased tomorrow, property taxes on homestead property can only raise by 10 percent a year.  Factoring in even modest market gains, it would take at least a decade for everything to catch up (unless you buy or sell).

Of course eradicating non-disclosure would take leadership capable of keeping my 37-cents-per-day and filling in some potholes or improving public education rather than pandering to those who mistakenly think zero tax is the ultimate goal.

I’m not holding my breath. After all, the politically influential owners of multi-million dollar homes and large commercial property portfolios are the ones with no incentive to change a system that has benefited them for so long.

Remember:  Do you have an HOA story to tell?  A little high-rise history? Realtors, want to feature a listing in need of renovation or one that’s complete with flying colors?  How about hosting a Candy’s Dirt Staff Meeting?  Shoot Jon an email.  Marriage proposals accepted (they’re legal)!  sharewithjon@candysdirt.com

13 Comment

  • The Texas constitution mandates equal and uniform treatment of property owners. Unfortunately, I have experienced first-hand that DCAD does not follow the constitution. A few years ago they were taxing my house substantially higher than comparable properties in my neighborhood and denied my protest despite the fact that I showed 20 similar nearby homes that were appraised lower. To this day, my property is still appraised higher than those comparable properties that immediately surround me.

    DCAD did know my purchase price, so I presume they have access to the MLS. Private sales can complicate the appraisal process for the reasons you mentioned. However, if DCAD were to follow the Texas Constitution and have one standard/process and equal treatment for all, then this data is less important.

    It’s going to take litigation or investigation by the Texas AG’s office for DCAD to change its policies. My only recourse after the protest denial was appeal to the county court. It’s not worth the legal fees for a few thousand a year in saved taxes, and DCAD knows this so they have carte blanche to do as they please.

    • mm

      I’ve been hearing varying opinions on DCAD access to MLS data. Some say NTREIS bars access, some say the opposite. As for Texas law on price disclosures, it says you don’t HAVE to but doesn’t mandate. So most don’t.

  • “If commercial property was taxed accurately, residential tax rates would likely plummet.”

    No, the politicians would just have more to squander and steal.

    • mm

      Ohhh, so the inaccuracy of taxation and tax avoidance are built on the idea that withholding taxes keeps the government from spending not that you’re cheating the system? Wow, I missed that in school.

      • mm

        No, it is not built on this idea but it helps. I do think and it has been proven that the more resources politicians have, the more they waste. I’m still a believer that rising tides raise all ships.

        • mm

          If that were true, why did Texas give property owners $3.8 billion in refunds when there’s clearly worthy causes we should have spent that money on? Refunds and bonds is not a winning equation.

    • mm

      Agree with Bill! But I still think commercial peeps should belly up with more taxes. It’s to their benefit, too.

  • Interesting story, but not totally factual. DCAD does have access to MLS data and track sales as well as building permits to help them add value to the tax rolls. While there are ways around disclosing the price paid for a property, DCAD has ways of accessing the price, usually by notifying the owner of a higher price and waiting for the owner to come in and protest the value, eventually showing the CAD a copy of the settlement statement.

    JON: As I’ve said in the comments, I hear different “facts” on DCAD access to MLS data.

    To say “DCAD is inefficient because of staffing issues endemic to many government agencies and … well … laziness. In the hottest market in decades, some properties are being reassessed every year while others, in hopping areas of town, still retain years’ old valuations” is false. Number one, I don’t believe they are lazy, and number two, by law every property has to be reassessed every 3 years. Of course they reassess areas with more activity, because that’s where they can add value for the school districts and government entities.

    JON: Regardless of the 3-year requirement, it is applied inconsistently when nearly identically located properties are reassessed every year when literal neighbors are given a pass for multiple years.

    Jon says “Would you believe five of 24 Mansion Residences are worth less today than in 1999? That’s 20 percent! This includes the 11th floor, a whole floor unit that’s worth $200,000 less today”, while my review shows the 11th floor unit was taxed at a value of $3,958,500 in 1999 and in 2015 was valued at $5,089,500 for an increase of $1,131,000. Further only three units (02W, 10E, & 12W), not five, are valued less than they were in 1999. The majority of the units haven’t been reappraised since 2013 so they will likely see increases when the 2016 values come out May 1st.


    JON: Thanks for spotting my math mix-up. The 11th floor has appreciated just $200K more, not less in the last 15 years ($5.25m in 1999 versus $5.45m in 2015).

    Jon said “If commercial property was taxed accurately, residential tax rates would likely plummet”. Commercial property owners fight hard to keep value in line with their competitors so they are not caught at a disadvantage. That doesn’t lead to residential rates plummeting, but it would lead to all rates coming down some.

    JON: That’s your opinion of the disparity of assessed value to actual market value. Without transparency in reporting, we’ll never know.

    He said “Property tax can only raise by 10 percent a year” – This statement is not true. While properties that are homesteaded enjoy a 10% cap on increases, all the commercial properties (think apartments, office buildings, retail centers, warehouses) and common folks rent houses have no cap. Values can double. I represent a large number of investors who own from 1 to a couple hundred rental properties and in Harris County (Houston) I saw 35% increases last year. Take a $100,000 rent house with taxes of $2,870, then have the value jump to $135,000. The property taxes go up to $3,875, a $1000 jump. Now what’s the tenant going to do when it’s time to renew and you have to increase the rent by close to $100 a month just to pay taxes. Ouch!

    JON: I was speaking of residential increases to tax increases, not investment or commercial properties. You seem to be saying that taxes should be kept inaccurate for the benefit of tenants. You also seem to be missing the point of this article. Namely, if a municipality needs $X in property tax revenues to operate at the level they want, then property has to be taxed at X%. If property valuations were accurate and the municipal budget relatively stable, then the rate of taxation could be set more accurately (lower). Such a system would not see huge tax bill increases but rather result in lower tax rates matched to higher valuations. Those with the greatest increase in actual monies paid would be those with the least accurate valuations today…which is not the majority of average homeowners.

    The Texas Tax Code offers protection for us and if you know the rules it’s basically a good system.

    JON: I feel disclosure would make it better.

  • This is nothing new. Appraisers, Realtors, real estate professionals, and the tax paying people of Texas all know this. The question is: How are you going to get full disclosure through the Texas Legislature? Also as I pointed out before the title of your article is wrong it is called the Dallas “Central” Appraisal District. Not The Dallas “County” Appraisal District. Journalism 101 ….. get the spelling of the name or organization. It adds credibility to your article and your argument

  • I’m a member of the Texas Association of Property Tax Professionals.
    Here’s a good video explaining Property Tax Equality and how it’s supposed to work.

    https://www.youtube.com/watch?v=Wjc8CwjZF5c

    One solution would be to bring every single property up to market value at the same time, which would effectively solve the Equal and Uniform angle many properties use.

  • I don’t even understand why property tax is assessed based on the value added to the land. If it’s a property tax, a tax for the land you own, why does a new build need to pay more for a lot the same size as a tear down? Are there more tax dollars needed to service the new build? No.


    JON: I’m not sure I understand the question? If you’re questioning the reason for taxing structures AND land, both are considered property.

    • Thanks for the reply Jon. I just don’t feel like the structure should be included anymore than the car you drive which is your property isn’t included.

  • I do home inspections in Dallas. This was a very intersting read, ill have to do some more reading on this topic. Thanks for the post.