It is almost axiomatic in real estate that when the remodeling contractor walks out the door, the tax assessor walks in.
Increased property taxes inevitably follow home improvements, leading many owners to complain they are being penalized for doing what is right - fixing up their homes - while others simply forego repairs.
Various ways of coping with this ironic situation include an "excess profits" tax on speculators and a "site value" tax, which means taxing all parcels in the same area the same way, regardless of what is built on them. Another is tax abatement for rehabilitation, now in effect in a number of states and municipalities, including New York, Boston and Chicago.
Here, the District government is authorized to make regulations granting such relief, but has opted not to do so. None of the other jurisdictions in this area has the power to establish different tax rates for land and the improvements thereon, a spokeswoman for the Metropolitan Washington Council of Governments said.
Common to all tax abatement plans elsewhere is a moratorium for several years on increasing the assessed value of the property by the amount of the improvements. Otherwise, the laws vary considerably in intent and scope, with some expressly designed to aid inner-city rehabilitation and others seemingly tailored for middle-income suburbs. In the same manner, the laws' success - or lack of it - has apparently depended not so much on inherent merits as on backers' support.
Edward Meyers, staff director of D.C. City Councilman Marion Barry's committee on finance and revenue, calls abatement a "tax giveaway," and maintains that rehabilitation is going on strongly enough anyway in the city. The City Council has already considered (and rejected) tax incentives, he said, adding that such measures will not be needed "until we can get information that this would produce rehabilitation for those who otherwise wouldn't be able to do it."
In Chicago, one of tax abatement's most enthusiastic backers is Thomas Tully, tax assessor for Cook County, I11. He calculated that a tax exemption for rehabilitation would not only stabilize deteriorating Chicago neighborhoods without a decrease in tax revenues; any losses would be offset by the stimulus of $400 million in increased reconstruction over a four year period.
So the Illinois legislature declared last year that in counties with a million or more inhabitants, owners of residential property with as many as seven units can have the amount of their new improvements - up to an annual maximum of $15,000 - forgiven by the tax assessor for as long as four years after completion. If the dwelling is sold before the four years are up, the new owner also benefits from the tax relief.
For example, if a person buys a $30,000 home and puts in $15,000 of repairs in 1977, the assessed value of the property will be 17 per cent (Chicago's current rate) of $30,000 until 1981, when it goes up to $45,000. If, however, the owner puts in another $15,000 of remodeling in 1978, the assessed value of the dwelling in 1982 will be 17 per cent of $45,000 (not $60,000) and so on indefinitely. The annual maximum of $15,000 has overwhelmingly benefitted homeowners making improvements a little at a time rather than developers who do a complete renovation at one time, officials feel.
In a telephone interview, Tully called the law a great success, psychologically as well as materially. A dramatic growth has resulted in the number of building permits issued, he said, while savings and loan associations are promoting 6.75 per cent home improvement loans. Inflation - higher selling prices of homes - has taken care of any loss in tax revenues, he said.
Thus far some 35,000 individuals have taken advantage of the relief. Most improvements have been additions to single family homes. Tully cited in particular the rehabilitation of old houses on Chicago's near North Side by young couples moving back into the city. Tully attributed the plan's success in great measure to his own personal publicity campaign of speeches and brochures outlining the advantages.
In neighboring Indiana, the law dating back to 1970 seems to have fared less well, if the Evansville experience is typical. There, city records show, only a few homeowners have applied for relief, with the largest assessment rebate, $25,000 for five years, going to a clinic in a blighted area.
Indiana law sets a limit on the assessed value of property prior to rehabilitation. The limit for a single-family dwelling, for example, is set at $5,000, thus emphasizing the law's intent of improving poor housing. The maximum annual deduction for such a unit is $5,000 annually, or 50 per cent of the increase attributed to rehabilitation, whichever is smaller.
A law in Michigan, passed last year, permits property owners to spend as much as $4,000 annually for three consecutive years without incurring higher assessments. However, the law limits the imporvements to those that can be made without a building permit, such as wiring, plumbing, painting, etc. The intent was to encourage the poor, the elderly, the landlords to maintain their homes. Affluent suburbanites adding garages or enclosed terraces, or developers knocking out walls and gutting inner-city houses don't get the same tax break.
Although Detroit has its own ordinance, the law is just now being implemented elsewhere in the state, a delay resulting from an unsuccessful challenge by the state tax commission. The commissioners contended that the legislation amounted to an unfair levy because assessors would not be able to determine the fair market value if they could not take improvements into account. Ultimately, the commission argued, the owners' sales prices would be reduced.
The commissioners also argued that a person who bought a house in which no improvements were needed would have to pay taxes at a higher rate than those who put in improvements. Unspoken but understood was the commissioners' objection to anticipated tax revenues losses. Last month the attorney general overruled them and the law went into effect.
A Wilmington, Del., ordinance dating from 1973 grants a credit of 150 per cent for five years on the increased assessed value due to renovation. Thus, if a person owning a home valued at $10,000 put in $3,000 worth of improvements, the assessed value would normally rise to $13,000. Under the law, the Wilmington resident will have $4,500 subtracted from the assessment so the house's value for tax purposes will be $5,500 for five years. After that it will be assessed at $13,000.
Wilmington's law places no maximum on the amount of annual improvement. In practice, by making improvements worth twice the amount of a board-up shell, developers have been able to reduce assessed value - and the accompanying taxes - to zero. In case of sale, the benefit is passed on to the new owner from the remainder of the five year period.