Taxes may be inevitable, but that does not make them infallible. Most people may not question their property taxes, but doing so may be to your benefit.
The New York City Department of Finance is charged with estimating values of New York City residential and commercial properties, with tax rates set each year by the Mayor and City Council. The annual tax rates are applied to property values to help determine each homeowner’s annual tax liability. In mid-January, the Department of Finance mails out Notices of Property Value to property owners throughout the five boroughs. The Notice will indicate how the city estimated its market value for the upcoming tentative assessment roll published on January 15th.
According to the Department of Finance, state law requires the Department of Finance to value most condos and co-ops as if they were in residential rental buildings, which are valued based on their income producing potential using the Real Property Income and Expense statements they file each year.
Most properties in New York City, with the exception of one-, two-, and three-family homes and utilities, are valued by what is known in appraisal parlance as the “income approach” to value. Under this valuation method, the city uses actual or estimated income and expenses to arrive at a net operating income, which is then capitalized to determine present value. The Notice of Property Value will show each of these underlying components, however, it will not show the square footage breakdown, as between retail, residential, garage etc. Since many taxpayers are not familiar with the income approach, the tendency is to simply file away the Notice without too much scrutiny or thought as to its tax consequences.
While the income, expenses and cap rate may be subjective variables in the assessment equation, the square footage of the property is not. The city refers to a property’s square footage as the “gross building area” because it taxes property owners on every square inch of the property, from outside brick to outside brick.
Most of the time, the city simply uses the same square footage it has had on file for decades in valuing properties. But what if the use of the property has changed? Was this information correct to begin with when obtained decades ago? Assessments are presumed correct. However, if you think that your square footage is overstated, you’ll need to contest the gross building area. To do this, you’ll need an engineer’s report along with a stacking plan delineating the space with the actual use and setting forth the square footage calculations. An overstatement of the square footage can easily lead to a burdensome tax implication over time.