Ugh! I got our property tax bills a few days ago and I am hopping mad. For 2018, our property taxes will increase from $15,984 to $17,722. That’s 11% increase or $1,738 more. I knew that property tax always goes up, but I still get a little angry every year when I see the new bills. It’s annoying because our quality of life hasn’t improved at all with these tax increases. The city is full of homeless camps, the traffic is in gridlock all the time, and Portland’s high school graduation rate is still subpar at 75%. Our state’s graduation rate is even more dismal at 74%, that’s 3rd worse in the nation. Why the heck is property tax going up so much when everything is getting worse? Well, I’m exaggerating a bit. Portland QoL isn’t getting worse, but it isn’t improving much either. Not 11% anyway.
Property Tax Rule
Our property tax rule is a bit complicated, but I’ll try to explain it simply. In the 1997, the taxable value of properties were frozen and this “assessed value” can increase only 3% every year. The property tax is based on the assessed value and most homeowners pay a little more taxes every year. The city can reassess a home when the homeowner makes major improvements such as a basement refinishing or a kitchen remodel. Reassessment usually means the AV and property tax will increase.
Property tax can also increase when voters pass various bonds.
We’ll take a look at our duplex as an example.
The AV increased 3%, but the tax increased 9%. This increase is due to 2 bonds that passed in 2017. A $750 million school bond and a $250 million affordable housing bond. Voters passed these bonds and everyone will have to pay for them. Even renters will feel the effect of the property tax increase because rent will go up. Landlords can’t eat all these increases. Our property tax, insurance, and HOA fee have all increased over the last 12 months.
Note: The AV is usually much lower than the real value of a property because the increase is capped to 3% annually. I’ll ignore the “real market value” for now because I don’t want to complicate the issue further. The property is often reassessed when it is sold, but if there are no major improvements, then the AV won’t increase over 3%.
My main complaint this year
I’m not happy with 9% property tax increase at the duplex, but I can take it. I voted for the school bond and I knew that would increase the property tax. Hell, the city is going to completely rebuild our high school and RB40Jr will go to a modern high school when he gets there. That’s not a bad deal for us. Many of our schools are very old and the bond will update them.
However, I am not happy about our 1BD/1BA rental condo. Check it out.
|1BD/1BA Condo||AV||Property tax|
The AV increased 15% and the tax increased 16%! What the heck happened to the 3% cap? We haven’t done any remodeling so I have no idea why they increased our AV so much. I checked with some neighbors and their AV increased just 3%. I’m definitely going down to the property tax office this year to appeal the increase. Of course, there is a $30 filing fee, but I’ll take my chances.
The property tax increase is a big burden on this condo because the rent is already pretty high. I’m having a hard time finding a new tenant with higher rent. This unit was breaking even last year, but we’ll have negative cash flow next year with increasing property tax, insurance, and HOA fee. I was planning to rent this unit out for 2 more years until the new building next door finishes, but this increase is changing my mind. Now, I’m going to post it for sale and for rent. If I can find a new tenant, that’s fine, but I’m okay with selling and taking profit as well.
If we sell and take profit, we’ll have around $100,000 to invest after fees and a ton of tax*. I can invest with RealtyShares and generate around 8-10% per year. The income would improve our cash flow quite a bit. We’d miss out on the appreciation, but that is slowing down anyway. I doubt the price will increase much for this condo over the next few years. There is a frenzy of new construction going on in Portland and thousands of units will come on line over the next few years. I talked to a couple of real estate people and they confirmed that the local market is softening.
*I ran a preliminary calculation and it looks like we have to pay about $17,000 in transaction fees and about $40,000 in capital gain taxes. That bites. We could do a 1031 exchange to save on tax, but I don’t really want to deal with another rental in Portland at this time. Maybe I’d go for it if the real estate crashes again, but not now.
Property Tax Charts
This chart below shows the history of the taxes on our properties.
We’re paying more and more property tax every year. At this rate, we’ll hit $20,000 per year very soon if nothing changes. The best deal here is our duplex. Compared to the condos, we aren’t paying that much at all per sq ft. The duplex is about twice as big as our home and the property tax is about 20% higher. Our home and the 1BD/1BA condo were remodeled in 2006 and reassessed. The duplex hasn’t had a major remodel since the 80s and the AV increased at a steady 3%.
Assessed Value Chart
The chart below shows the AV of our properties.
This AV value for the 1BD/1BA is very strange. It took a big dip in 2011 and recently increased at a much higher rate. The AV for the other 2 properties looks pretty normal.
Another strange thing is that the property tax on the 1BD/1BA hasn’t increased as much as the AV. If you look at the previous chart, the property tax for the 1BD/1BA has been pretty reasonable. The 15% increase this year is abnormal.
Real Market Value Chart
Just for fun, we’ll look at the “real market value” as well. This is the city’s best guess at what a property is really worth.
Ah-Ha! The old light bulb just went on. The property tax for the 1BD/1BA must be based on RMV. Here is the full tax code from the city’s website.
How are my property taxes calculated?
Two calculations are performed each year to determine your property tax amount. The tax bill is always the lower of these two amounts:
- Your Assessed Value is multiplied by the tax rate for your code area, and any Special Assessments are added.
- Your Real Market Value is multiplied by the Measure 5 limits of $5 per $1000 for Education taxes (or .005 x RMV) and $10 per $1000 for General Government taxes (or .010 x RMV). This amount is then added to the amount for items that are excluded from the Measure 5 limits.
I usually ignore rule #2 because RMV is normally much higher than AV. Our primary residence and duplex have low AV and the property taxes are calculated with rule #1. The 1BD/1BA has ridiculous AV so it falls under rule #2. Yeap, it’s time to go in to appeal to the board.
The RMV for our primary residence is also too high. I’d be happy to sell the place for $400,000. There is no way we’d get $500,000 for this home. I’ll just appeal both properties. Wish me luck.
How about you? Do you get psychotic every time you see your new property tax bill?
***If you want to invest in real estate, but don’t want to be a landlord, check out RealtyShares. You can generate very nice passive income from funding different real estate projects like apartments, offices, restaurants, and single family homes. See how I’m doing with my real estate crowdfunding investment.
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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