Home values and property taxes

By Senator Jim Elliot

Property and home values have increased in many areas in Montana over the past decade and while folks equate increasing residential values with higher taxes, but it ain't necessarily so. Yes, people moving to Montana are building large homes and driving up the price of land, and, yes, people who have owned their homes for a long time may see them increase in value as a result, but rising real estate prices do not guarantee higher taxes for a couple of reasons. First, Montana taxes only a percentage of the appraised value of homes and commercial buildings, and that percentage is set by the Legislature; and second, modest homes do not increase in value because of fancy new homes.

The Montana Constitution dictates that property values be equalized, which means every property has to be appraised using a standard method of determining value across building types and building uses. Montana does this by using the market value, and it determines that value in the same way for every building all across the state.

Simply put, market value is the price at which a buyer and seller agree upon to exchange property. Most people do not often have their homes up for sale, but the Department of Revenue (DOR) needs to know their value even if they are not on the market. They do that by comparing dwellings not on the market with similar properties that have recently sold. That means that every building has to be classified so it can be compared to similar properties. To this end DOR appraisers visit each individual property, measure houses, tally the number of rooms, note the kind of siding and roofing—essentially take inventory of the entire dwelling. They classify it, and look for similar properties to compare it with, just as a private real estate appraiser does. This is now done on a statewide basis every six years.

If you live in a development where all homes are drawn from essentially the same plan, homes that are not for sale will be valued at the price for which neighboring homes sold. If your home is unique to your neighborhood, the comparison will be the sale price for which houses similar to yours have sold in neighborhoods similar to yours. If you live in a modest dwelling next to a new mansion, the value of that mansion will not directly affect the value of your home.

But a home sits on a piece of land which has its own separate value, and your land value is affected by what the land under the mansion cost, if it is the same kind of land. For instance, if both lots have a lake view, the values will be similar; if only the mansion has the view your lot will not be worth as much as the mansion's.

So because the price of land is being bid up by development it is likely that the value of your parcel is increasing similarly. Strangely enough, according to some research I asked the DOR to do for me, land values don't have a lot to do with the value of the structures on them. That's because the land value is dependent on the sale price of similar neighboring lots, but home values are determined by the value of similar homes which may not even be in the same neighborhood. This means that the value of your lot could increase dramatically, but the value of the building on it may not.

But the odds are good that your home value has increased anyway, if only due to inflation, so what's to prevent your taxes from property taxes from going up? If taxes were assessed on the full value of your home, nothing; but Montana taxes only a percentage of that value, and that percentage—called the tax rate—is adjustable. Real estate values are beyond the control of the legislature, but the tax rate isn't, so in every past reappraisal cycle when there has been a significant increase in statewide property values the legislature has lowered the tax rate to keep taxes as level as possible from one year to the next.

When economic conditions were similar all across the state—that is to say when Montana's economy was dominated by the production of metals, timber, and agriculture— this was accomplished simply by adjusting the tax rate. For instance, if housing values doubled, the tax rate could be cut by half. But as scenery became a commodity and people moved to Montana to retire or build vacation homes, land prices in the mountain valleys increased dramatically in comparison to the prairie, setting up a more complex problem which has had to be addressed in a more complex way.

Complex or not, it is addressed, and this year's reappraisal will leave next year's tax collections unchanged across the entire state. There will be differences from home to home, however; some may see tax increases, and others decreases, but the majority will see little, if any, change at all.