The Virginia Supreme Court has ruled that land commonly owned by members of a homeowners association can be taxed only as having a "nominal" value.
The court, in a decision handed down last week, reasoned that, because commonly owned land is encumbered by easements allowing each homeowner the right to use the land and improvements, those easements shift the value of the common land to the individual homes of the association members.
This decision could bolster the case for a newly passed law awaiting the signature of Virginia Gov. Charles S. Robb that establishes a standard procedure for the taxing land commonly owned by members of a homeowners association.
In a move that some legislators called an "unconstitutional tax break for a minority of homeowners," the Virginia General Assembly passed a bill at the end of its legislative session several weeks ago that shifts the burden of paying the tax on the common property of a homeowners association from the association to the individual homeowners.
In the past there has been no state policy on this issue, and local jurisdictions have chosen various ways of taxing commonly owned property. In general, most jurisdictions taxed the homeowner association for the common property.
In the case of Reston, one of the largest homeowners associations in the state, the Reston Home Owners Association has been taxed by the county for the value of all the commonly owned amenities, such as the pools, tennis courts and lakes. RHOA's 1985 real estate property tax bill was estimated to be $38,000.
But Reston residents, and members of other communities with homeowners associations, have argued that the value of the common amenities was also being included in the assessed value of each individual house, resulting in what they believed was a policy of "double taxation."
"It's an equity issue," said Kenneth R. Plum, the Reston representative to the Virginia House of Delegates and the sponsor of the bill. "The bill only establishes for homeowners associations the same method of taxation used for commonly owned property of condominium associations."
What the new law does is allow jurisdictions to tax commonly owned land by adding a prorated share of the value of the common property to the individual assessments of each residence in the association. The new law is being reviewed by the state attorney general before being forwarded to Robb for his signature.
While Fairfax County assessment officials have said they did not engage in "double taxation" of homeowners association land, they said that the new law would cost the county at least $280,000 in annual property-tax revenue.
"This would be a substantial loss, in that it would include almost any town house development or cluster subdivision, not just the big planned communities like Reston and Burke," said Fairfax Supervisor Nancy K. Falck. She said that the bill "gives members of homeowners associations a tax break and puts the additional tax burden on county residents who don't live in a planned-unit development."
The Virginia Municipal League has questioned the constitutionality of the measure and said it is seeking legal opinions and impact estimates from cities and towns around the state.
Complaints that the new law is not constitutional may have been made moot state Supreme Court's decision in Lake Monticello Owners' Association vs. Fluvanna County.
In Lake Monticello, which grew out of a dispute between the homeowners association of a large recreational subdivision and the local tax assessor, the court decided to extend to homeowners associations a legal precedent arising from a 1963 case involving the assessment of a piece of property that had two dams on it.
In that case, Bank vs. Amherst County, the Virginia Supreme Court ruled that when one property is encumbered with easements to benefit another piece of property, then the value of the encumbered property must be reduced and the value of the enhanced property be increased.
In Lake Monticello, Fluvanna County tax assessors had determined that the commonly owned property of the Lake Monticello homeowners association had a value of $1 million of its own, regardless of the easements that encumbered it.
The county tax assessors reached this conclusion after golf memberships were sold to non-residents of the community.
The county tax assessors argued that the golf course and other amenities had an intrinsic market value, as proven by the willingness of non-residents to buy memberships. The assessors told the court that, in order to avoid taxing the residents twice, they had reduced the individual home assessments by a prorated amount of the value they gave to the common property.
But the court ruled that the assessors should have done it the other way around, reducing the value of the common property and increasing the value of the individual homes for tax purposes, as the recently passed bill would require.
While the court said nothing about the new law awaiting Robb's signature, some legislators that supported the bill say the court's decision endorses the validity of the new law.
"I'm very pleased with this decision because I think it supports what we've been saying all along," said Plum.