By Stephen H. Paul, As published in Midwest Real Estate News, August 2006
Starting with March 1, 2006 assessment date, the Indiana General Assembly requires Indiana’s Department of Local Government Finance to implement rules establishing throughout the state a system for annually adjusting or trending the assessed value of real property for property tax purposes. These new rules reflect inflation and deflation in the years since the 2002 general reassessment of property. Annual adjustments will be calculated each year until the next statewide general reassessment in 2011. The stated purpose of the rules adopted by the Department is to “ensure that the annual assessed valuations are reflective of current market value in use conditions.” This exercise may not sit well with property owners.
Historically, for real estate tax purposes, Indiana has valued property based upon a cost approach rather than market value. After many years of litigation, the Indiana Supreme Court finally decided the issue, holding that, although the cost approach was constitutiona, a market value-based assessment was also constitutional. In light of that the Indiana Department of Local Government Finance has promulgated a framework of rules and regulations allowing assessors to base property tax values on a market value approach.
One premise of the market value approach holds that market values change over time. The last statewide reassessment was effective as of March 1, 2002, based on values as of January 1999. This first trending adjustment could well show significant assessment increases, since it will be effective as of the March 1, 2006 assessment date for taxes payable in 2007 and thereafter, but is based upon market values as of January 2005.
The Indiana Department of Local Government Finance promulgated a set of regulations governing the trending reassessment, which set out the methodology to be used by local assessing officials in determining the assessed value changed as of the March 1, 2006 assessment date. These regulations are complicated and require a basic understanding of statistical analysis, something very few, if any, local assessors possess.
Basically, the regulations provide that local assessment officials review statistics for real property sales that occurred during the two-year period from January 1, 2004 to December 31, 2005. If sales data for that period is insufficient, the officials may use sales from an earlier or more recent period, or both, after making the appropriate adjustments.
If the sales data evidences a discernable trend in market values, a trending factor is to be determined for the properties within the market area. If insufficient sales data is available, reference to certain cost and other market data evidence is allowable in determining the appropriate trending factor.
For example, assume that a review of the relevant sales data indicates that shopping centers in a specific market area have an average seen a market value increase from January 1999 to January 2005 of 17 percent. The assessor is then instructed to multiply the March 1, 2002 assessment by 117 percent to arrive at the March 1, 2006 “trended” market value.
Apartment buildings are accorded special treatment under Indiana assessment laws since properties with more than four rental units may be valued based on application of the least of the cost, sales comparison or income capitalization approaches.
Once completing the trending exercise, local units of government may then determine tax rates beginning in 2007 on a n annual basis. At some point, however, between the determination of the trending factors and the issuance of the tax rates, assessment notices will be sent to property owners showing the trended assessed values. This notice of assessment triggers the taxpayer’s appeal rights.
Since 2006 marks the first application of the trending exercise in Indiana, no one knows how assessors will react to this labyrinth of statistical gyrations. Unlike an upward trend in the stock market, however, this trend will most likely result in frowns rather than smiles for property owners. Given that the 2006 trended values serve as basis, taxpayers are advised to pay close attention to this trending exercise.
