Property owners large and small review the same confusing tax notices every February. The tax notice contains a State Equalized Value (SEV), Assessed Value and Taxable Value, then there is an increase or decrease from the prior year. Let's review what these values mean, how they are determined every 12 months, and how they impact you!

SEV or State Equalized Value: The Appraisal

In Michigan, property assessments are considered "Ad Valorem" or at value. Your assessment is based on an appraisal of your properties value and this appraisal is completed every 12 months for a value on Tax Day (December 31). Your appraisal is completed by the Assessor via the Cost Approach to Value. Since Assessors are responsible for thousands of parcels and reappraise each year, the Cost Approach to Value is the only technique suitable for mass appraisal. Essentially, a replacement cost is estimated for every building using a cost manual. Depreciation and economic conditions factors are applied to account for age and other differences / influences in each market. The estimated building values are added to land values and you have a Cost Approach to Value appraisal of your property. Sales data is also considered and applied in the economic conditions factors. Your State Equalized Value is 50% of this appraisal value, and can increase and decrease depending on what's happening in the marketplace. The Assessor has complete control over this # and its increase / decrease is driven by sales data of similar properties.

Taxable Value: The Formula

Your Taxable Value is what dictates the amount of property taxes you pay. The Taxable Value is the lesser of the SEV or Capped Value (yep, another value- but let's stick with SEV & Taxable Value today). Assessor's run a formula on each parcel to determine the Capped Value: (Prior Year Taxable - Losses) x (CPI or 5%, whichever is less) + additions. The Taxable Value becomes the lesser of the SEV or Capped Value. The great thing about Taxable Value is that it can only increase by the CPI or 5% (whichever is less) each year, unless there is a transfer of ownership or value is added (think "additions" from the formula). When there is a transfer of ownership, the taxable value uncaps the year following the sale and increases to the current SEV.

An Example

Many new property owners are surprised when the tax bill for the property they just purchased is higher than they originally anticipated. Let's discuss a commercial property with a current SEV of $600,000 and a Taxable Value of $400,000. Remember, since the SEV is 50% of market value, the Assessor has a suggested market value of $1.2 Million on this property. The property is sold in November of 2015 for $1,000,000 to a completely new owner. In the 2016 Tax Year, the new SEV is calculated using the Cost Approach to Value and will most likely be slightly higher or lower than the 2015 SEV. If the market is good, it could be 5% higher than the previous year, which would be an SEV of $630,000. If the new 2016 SEV was calculated to be $630,000, the new owner would be paying taxes on a new Taxable Value of $630,000, up from the prior years $400,000. If the millage rate is 50 Mills or 0.05, the annual tax bill would increase to $31,500 against a taxable value of $630,000 for 2016- up from $20,000 against a taxable value of $400,000 in 2015. Even the best investors would be thrown off at that large increase in annual expenses.

Keeping a pulse on your assessor record and the annual changes that can occur will minimize surprises and help you stay focused on your business. It also helps you only pay your fair share of property taxes.