Real Property Tax Assessment Act
The PEI Real Estate Association had an education session today on Real Property Assessment and the recent changes made to the legislation. REALTORS® were concerned with this change in legislation and how it may affect our industry so the Association decided it was a good idea to have the PEI Tax department come and explain the terms to us. It was an informative session and I have to say the Provincial Tax Commissioner, Beth Gaudet, did a wonderful job in the "hot seat" during the presentation in answering questions from the group of REALTORS®.
I am going to attempt to explain in simple terms what was conveyed to us today. The session was all morning, so I won't go in to all the details that were presented. I hope to cover the information that most people need to know when reading and understanding their tax bill.
Right now on your tax bill you have two values appearing on your "Summary of Assessment". One is called MARKET VALUE and the other is called FROZEN RESIDENTIAL. Effective January 1, 2010 the frozen residential is no longer frozen. It will appear on your 2010 tax bill as TAXABLE VALUE assessment.
For the past three years, property assessments on owner occupied residential property have been frozen. Therefore, unless there had been new construction or improvements on your property, the FROZEN RESIDENTIAL value on your tax bills should not have changed. The MARKET VALUE has continued to grow over the past three years based on a mass appraisal system used by the government. This may be where there is some confusion as when people think of "appraisals", they think of someone coming to their house and looking at it from the inside out which then gives them a report or an "appraisal" based solely on their property. This appraisal is often very close to the price of the home when it is put on the market to sell. The government, however, must assess all real property in the province each year and uses a "mass appraisal" system to do this.
Initially, an individual MARKET VALUE assessment is assigned to a new property. This assessment is the result of one or more on-site visits where an assessor will assign a value to the land and buildings. In general, a grading scale is used to capture size, the cost of construction for the respective components of the buildings (i.e. foundation and basement, windows and doors, exterior, etc.) and market conditions given the location of property. The grading scale is aimed at ensuring uniformity and comparability where, for example, a 3 bedroom bungalow with the same construction components and in the same area will have comparable values.
From that point on, however, annual adjustments to MARKET VALUE assessment are based on mass appraisal. For mass appraisal, government uses an analysis of the average sale price (three years of historical sales data) as compared to the average MARKET VALUE assessment for all property in a particular are or work unit. This is referred to as an assessment to sales ratio. A high assessment sales ratio is used as an indicator that on average the value of property in a particular area or work unit is in line with sale prices. Conversely, a low assessment to sales ratio is an indicator that on average the value of property in a particular area or work unit is low relative to sale prices. This assessment to sales ratio, together with market factors, is used to set an annual adjustment factor (usually in the range of 0-10%) for each work unit. Annual adjustments are applied to all property in that particular area or work unit to move the average MARKET VALUE assessment closer to the average sale price.
If you had work done to your home, information on building permits available to the tax department may be a reason for them to re-evaluate your home's MARKET VALUE assessment. In this case, the assessor would make an on-site visit to the property and, using the same grading scale as was used in the initial assessment of the property, re-assess the value of the property. As a result, the MARKET VALUE assessment for the property could be confirmed at the original value, increased to reflect the value of the property improvements, or decreased should the overall value of the property be determined less than the MARKET VALUE assessment on file. Any increase in MARKET VALUE assessment due to improvements is reflected both in MARKET VALUE assessment and the TAXABLE VALUE assessment.
Now as far as the FROZEN RESIDENTIAL tax assessment goes - that has been frozen for the past three years. That is the amount home owners are taxed upon. So home owners have seen no rise in this amount over the past three years and is the amount home owners have been taxed upon. So home owners have seen no rise (unless there had been new construction or improvements) in this amount over the past three years. The FROZEN RESIDENTIAL becomes the TAXABLE VALUE assessment on December 31, 2009 and is going to rise from here on in based on the CPI (Consumer Price Index) of the previous year. Since CPI was below zero in 2009, all TAXABLE VALUE assessments will remain the same for 2010 so property assessments will not increase. There is also protection for property owners in place which will cap the increase at 5%. So if there is a year the CPI is above 5%, the TAXABLE VALUE assessment will not increase more than the 5%. This is good for property owners in one way as you won't have to guess what your increase will be as you await your tax bill in May. You should have a pretty good idea what the increase will be based on the previous year's CPI. The government decided to use this process so there would be some transparency on the tax system and how it was calculated. They also found that in previous years if taxes rose in a certain area because of increased sales or development in an area, some people who had homes they had lived in for years with no updates were being taxed at an unreasonable rate based on homes around them. This won't happen now because the TAXABLE VALUE assessments will only rise at the rate of CPI, not at the rate of growth around the area of the residence.
If you are a home buyer, the news isn't as great. Since 2003, property taxes for a home buyer have been based on the full MARKET VALUE assessment and in most cases been greater than the taxes paid by the seller. Although this is not a change, it is something that came to light for REALTORS® on PEI as a result of the recent legislative amendments. Your taxes for the first year (or portion of the year) of ownership will be based on the MARKET VALUE assessment found on the public assessment roll for that property. In other words, the TAXABLE VALUE assessment for home buyers at date of purchase is set at this MARKET VALUE assessment. From this point forward, the TAXABLE VALUE assessment will increase annually by CPI as described above.
REALTORS® have expressed great concern about this part of the bill as we were worried that there would be a huge gap arising between the two taxes and this would cause a deterrent for people to sell their homes. The government has indicated that right now there is an average of a 4% difference between the MARKET VALUE assessment and the TAXABLE VALUE assessments on people's tax bill. We were concerned that these two assessments were going to grow at different rates since there are different factors determining both of them. Of course, the government can't predict the future, but they have researched the past ten years and have concluded that this shouldn't happen in the years to come based on numbers gathered from the past. They have also told us that if it does happen (and REALTORS® will be keeping a close eye on this), and/or data shows that the difference can be linked to deterring people from selling their homes, there will be some sort of recommendations put forward to resolve the problem.
So, as it stands now, a buyer will pay taxes on the MARKET VALUE assessment on a home when they purchase it. In most cases, this amount is higher than the TAXABLE VALUE assessment so a buyer's taxes will be higher than the current owners. At this point, the MARKET VALUE assessment is then moved to the TAXABLE VALUE assessment on the buyer's tax bill and going forward it will increase at the same rate of the CPI, just like everyone else's. The same value will remain in the MARKET VALUE assessment and that will grow based on the same formula as before using the mass appraisal and other criteria by the government.
We hope going forward that the process becomes easier to understand for current home owners and home purchasers. One thing we caution home owners to do is to keep an eye on both of these amounts on their tax bills. Although the government does not anticipate that the gap between the two will significantly exceed an average of 4%, we encourage you to look closely at your totals. Should the gap become a large one on your bill, we encourage you to contact the tax office or your local MLA. If this gap grows significantly, it could have an impact on your ease in selling your home. A potential buyer is not going to be happy about paying significantly higher taxes than you currently pay now and that is what will happen should the MARKET VALUE assessment rise to be a large percentage higher than your TAXABLE VALUE assessment. It may not seem important when you are living in your home, but some unforeseen future circumstance could see you having to put your home on the market and by then it may be too late to correct. As REALTORS®, we will only see this gap when we list your property, so it's up to the public to monitor their own tax bills on an ongoing basis.
One last thing of interest for home buyers. When you go to the bank or to your mortgage broker to calculate what you can afford to spend on a home, you should keep in mind you will be paying a higher tax than the current property owner. Make sure to ask your REALTOR® to find out the MARKET VALUE assessment of the home and take that number with you to your bank. We even encourage you to call the Tax office and ask them to calculate the amount of taxes you will be paying on your home based on that MARKET VALUE assessment. We as REALTORS® are able to give you the MARKET VALUE assessment, but we are not able to calculate the exact amount of taxes you will be paying based on that amount.
For more information on Real Property Tax you can visit this website: http://wwwtaxandland.pe.ca
Carol and Steve