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Ben Franklin famously proclaimed that, “In this world nothing is certain but death and taxes.” Although Mr. Franklin was correct that taxes are certain, the amount that property taxpayers need to pay is not as absolute. The recent slide in real estate values has caused many properties in New Jersey to be over assessed, thereby causing the respective taxpayers to pay a disproportionate amount of taxes. For these “aggrieved” taxpayers, an appeal of their assessment may serve as a way to save a significant amount of money. This article provides a brief summary of the property tax system implemented in New Jersey and also outlines the appeal process.

Property Tax Primer: The New Jersey Constitution requires that all real property be assessed for taxation: (1) under general laws; (2) by uniform rules; and (3) under the same standard of value. This mandate is further emphasized by N.J.S.A. 54:4-23, which is a statute that directs the assessor of each municipality to determine, as of October 1 of the pretax year, the full and fair value of each parcel of real property. Full and fair value has been defined as market value or the amount that a hypothetical buyer would pay a seller, both being in an equal bargaining position. Therefore, the full and fair value of a property is an amorphous standard that is constantly changing.

To accommodate for this constant change in value, the Division of Taxation publishes an annual ratio for each municipality that is meant to adjust the assessments in that municipality to reflect the market value of the assessed property. This ratio, commonly referred to as the Equalization Ratio, allows the assessment of a property to remain the same while market values fluctuate. For instance, if the ratio for Town A is 50% and the assessment of a property located in Town A is $100,000, the fair market value indicated by the assessment is $200,000 (100,000/.50). While this system works well in some circumstances, it is far from perfect and it causes many properties to be improperly valued in fluctuating and volatile markets. Notably, for the last decade, the ratio in most municipalities has consistently dropped each year because property values were increasing. Over the last 18 months, however, many properties have actually decreased in market value. This reduction in market value may have caused those properties to be over assessed because the ratio is based upon sales of real property in prior years. Thus, in a rapidly declining market, the Equalization Ratio becomes unreliable. Accordingly, the recent change in market conditions has left many properties over assessed because the ratio has not properly compensated for the loss in market value.

The Appeal Process: N.J.S.A. 54:3-21 allows an aggrieved taxpayer to appeal the assessment of their property. The first step in the appeal process is to determine if the property is assessed properly. There are law firms that specialize in tax appeals and have experience in property valuation for tax appeal purposes. Many of them will analyze your property, free of charge, to determine if the property is over assessed. It is important to recognize that your neighbor’s assessments or other another similarly situated property’s assessment are irrelevant. The only relevant issue is your property’s fair market value as of October 1 of the pretax year. Taxpayers must also consider the Chapter 123 corridor which provides the municipality with a 15% window of error, or buffer zone for assessments.

The next step is to decide which tribunal you wish to appeal the assessment to. The two options are the County Board of Taxation and the Tax Court of New Jersey.

Where the assessment is less than $750,000 the appeal must be filed with the appropriate County Board of Taxation. This action is commenced with a petition of appeal and is completed with a hearing before the Commissioners of the Board. It is imperative to recognize that the taxpayer carries the burden of proving that the property is over assessed. Generally, this requires the participation of a certified appraiser who will also have completed a report on their opinion of fair market value. If you are dissatisfied with the results of the hearing, you can appeal the Board’s decision to the Tax Court.

When an assessment is more than $750,000 the appeal may be filed directly with the Tax Court. The Tax Court is comprised of seven Judges with expertise in property valuation. An appeal is commenced with the filing of a complaint. The Tax Court has specific discovery deadlines and settlement conferences that must be strictly complied with. If settlement is not feasible, a formal trial will be scheduled. All trials in Tax Court are bench trials which means that the Tax Court Judge serves as the fact finder. A judgment from the Tax Court may be appealed, as of right, to the Superior Court, Appellate Division.

If the taxpayer prevails in securing a tax appeal judgment, through settlement or trial, that reduces its assessment, the “Freeze Act” prevents the municipality from increasing the assessment for the years covered by the tax appeal plus two additional years. Please note, that there are two exceptions that allow the municipality to increase an assessment during the freeze period. The first exception is triggered by a complete revaluation of all real property in the municipality. The second exception occurs when there is a substantial increase in the subject property’s value (such as an addition qualifying as an added assessment). Unless these specific exceptions apply, the municipality is barred from increasing the reduced assessment. At all times, however, the taxpayer may further appeal the assessment when appropriate.

The Three Approaches To Value: As discussed above, the critical question in a real estate tax appeal is the fair market value of the subject property. There are three approaches used to determine the value of property: (1) The market or sales comparison approach; (2) The income approach; and (3) The cost approach. The approach used for a property “depends upon the particular facts and the reaction to them of experts steeped in the history and hopes of the area.”

The market or sales comparison approach relies on sales of similarly situated or “comparable” properties to determine the market value of the subject property. Generally, the factors to determine which sales are comparable include: (1) proximity of sale date to the relevant assessing date; (2) size; (3) age; (4) construction; and (5) condition. Since no two properties are exactly the same, this approach requires the subjective opinion and analysis of an appraiser to “adjust” the comparable sales in order to determine the market value of the subject property. The market or sales comparison approach is generally favored by the Tax Court and is used when there are sufficient comparable sales for the type of property being valued.

The income approach is generally used to determine the market value of income producing property. Under this approach, the appraiser will calculate a market rent to determine the Potential Gross Income. Next, vacancy and collection rates are deducted to determine the Effective Gross Income. Then, the appropriate expenses are deducted to establish the Net Income. Finally the Net Income is divided by the capitalization rate to reveal the fair market value. This approach includes many amorphous variables and must be utilized with care and diligence. The income approach may be used for any income producing property. Since many income producing properties are experiencing higher vacancy rates, lower market rents and higher expenses, the fair market value of those properties may have decreased so that an appeal is warranted.

The cost approach values property by determining the current cost of constructing the property and then allowing for the appropriate amount of depreciation. This is a highly technical approach and will generally require the participation of an appraiser and a cost estimator. This approach is generally used to appraise new properties or those that are not frequently exchanged in the market. These types of properties are often called special purpose properties and include petroleum refineries and chemical plants.

An appraiser may consider one or more of the approaches to value. Regardless of which approach is used, it is vital that the expert takes great care to exclude any value attributed to personal property or business value.

Now more than ever, it is critical that all taxpayers ensure that they are paying the appropriate amount of property taxes. Since taxes are an inevitable expense, any potential tax savings will directly and positively affect a taxpayer’s bottom line. More importantly, during turbulent economic times, market value of real property decreases. Since assessments are based on market value, they should simultaneously fall with property value. A tax appeal can serve as the impetus to affect this correction.

Critically, the deadline to file a tax appeal is April 1. Therefore, it is prudent to contact a professional as soon as possible to determine if an appeal is warranted.

Robert Spiotti is an attorney at Davenport and Associates, a boutique firm dedicated to the practice of Real Estate Tax Appeals. He can be reached at 973-299-9925 or emailed at [email protected] The views expressed in this article are the authors’ own.

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