Property Tax Avoidance and Evasion Methods: A Comprehensive Guide
Property taxes are one of the primary sources of funding for local governments that provide essential services to communities. In the United States, property taxes are levied by local governments such as cities, counties, and school districts, and are based on the assessed value of the property. The amount of property tax varies according to the location, size, and type of property, as well as the local tax rates.
While property taxes are mandatory, there are ways to reduce the tax burden through legal means. Property tax avoidance and evasion methods are commonly used by property owners to minimize their property tax liability. This article explores the different methods of property tax avoidance and evasion, their legality, and the consequences of engaging in tax avoidance and evasion.
What is Property Tax Avoidance?
Property tax avoidance refers to the legal methods used by property owners to minimize their tax liability. Unlike tax evasion, which is illegal, property tax avoidance strategies are perfectly legal and ethical. Property tax avoidance is not only a legal right of property owners but also a responsible management and planning process.
Strategies for Property Tax Avoidance
1. Property Tax Exemptions
One of the easiest ways to reduce property taxes is to claim exemptions provided by local governments. Most states offer various exemptions for different categories of properties and owners, such as exemptions for senior citizens, veterans, disabled persons, and charitable organizations. These exemptions help to reduce the assessed value of the property, thereby reducing the property tax liability.
2. Appealing Property Assessments
Property owners can appeal their property assessments to challenge the assessed value of their property. Tax assessors use various methods to determine property values, including sales data, market trends, and property features. Property owners can hire an appraiser to evaluate their property and provide a written report to support the appeal. Appealing a property assessment can result in a reduced tax bill if the appeal is successful.
3. Property Tax Deferral
Property owners can also defer their property taxes by paying a portion of the tax bill over time rather than paying the full amount at once. This is especially useful for property owners facing financial difficulties or those who want to save money for other investments. Property tax deferral is available to homeowners, senior citizens, and disabled persons, among others, subject to certain conditions.
4. Property Tax Abatement
Property tax abatement is a tax incentive provided by local governments to encourage property owners to invest in their properties. Property owners are given a temporary or permanent reduction in property taxes in exchange for renovating or improving their properties. The abatement usually applies to the increased value resulting from the improvements, rather than the original value of the property.
5. Transferring Property Ownership
Transferring the ownership of the property to another person or entity can also reduce property taxes. Property owners can transfer the ownership through gift, sale, or inheritance. Gift and inheritance transfers are often subject to federal and state tax laws, so it is important to consult a tax professional before engaging in such transfers.
What is Property Tax Evasion?
Property tax evasion refers to the illegal methods used by property owners to evade payment of property taxes. Evasion can be achieved through deliberate misrepresentation of ownership, under-reporting of property value, and failure to report properties. Property tax evasion is a serious criminal offense that can result in fines, penalties, and even imprisonment.
Strategies for Property Tax Evasion
1. Phantom Homeownership
Phantom homeownership is a fraudulent scheme that involves transferring the ownership of a property to a straw buyer who has no real interest in the property. The straw buyer is used to obtain mortgage financing for the property, while the real owner occupies and benefits from the property. Phantom homeownership is a form of property tax evasion because it allows the real owner to avoid paying property taxes.
2. Under-Reporting Property Value
Under-reporting the value of a property is a common form of property tax evasion. Property owners may undervalue their properties by claiming that the property is in poor condition, lacks amenities, or has a high vacancy rate. Under-reporting property value can lead to lower assessed values, thereby reducing the property tax liability.
3. Non-Reporting of Properties
Some property owners intentionally fail to report the ownership of their properties to avoid paying property taxes. This is usually done by owners of rental properties who do not report the income from the rental properties to the authorities. Non-reporting of properties is a serious crime that can lead to fines and imprisonment.
Consequences of Engaging in Property Tax Evasion
Property tax evasion is a serious crime that carries severe consequences. These consequences can include fines, penalties, seizure of assets, and even imprisonment. Property owners found guilty of property tax evasion may also lose their right to own or transfer property.
Conclusion
In conclusion, property tax avoidance refers to legal methods used by property owners to minimize their tax liability, while property tax evasion refers to illegal methods used to evade payment of property taxes. While property tax avoidance is a legal right of property owners, it is important to engage in them ethically and responsibly. On the other hand, property tax evasion is a criminal offense with severe criminal sanctions. Property owners must be careful to abide by the law and report their properties accurately to avoid any legal issues.
Real property taxes are the largest source of revenue for local and state governments. Tax evasion in regards to the ad valorem tax is very difficult and can lead to felony charges. Tax avoidance techniques tend not work for property taxes; an individual who refuses to pay their property taxes will have their land stripped by the government.
Owning land is similar to living in an apartment, where the government acts as the landlord, and the property taxes are the rent. Property taxes enforce an individual to pay for the right to live on a piece of land. Tax avoidance techniques are nonexistent for property taxes, but there are numerous steps an individual can take to decrease the amount he or she pays.
The most obvious step taken to decrease the amount one owns, is simply to purchase less land or make little improvements on the land. Granted these methods are undesirable, but property taxes can greatly increase through substantial improvements. Like in real estate, location is everything when it comes to property taxes. Areas with strong public schools or a wealthy demographic tend to levy higher property taxes than working class or marginal locations.
A small home in a wealthy community will undoubtedly have a higher property tax rate than a larger home in a more desolate or undeveloped area. Owning land in a specific area is an individuals right, if they wish to live somewhere with high property taxes they are free to do so. That being said, there are techniques to lower one’s property taxes, but no practical strategy to take part in tax evasion.
Techniques to lower property taxes:
When your property is being assessed look for errors in the description of your physical property. In the official assessment your property will be examined fully, square footage, boundaries, the condition of the physical property the number of bedrooms in your home; all of these factors strongly effect the amount of property taxes you will pay. Errors happen during the assessment process, correcting mistakes is not a form of tax evasion, but instead a wise move to lower your property taxes.
When your property value is assessed compare it with other pieces of property in your area. If your assessment is considerably higher than your neighbors, a case questioning the assessment may be justified. Property’s often get marked up, or deemed more valuable than they actually are. If homes which are similar in terms of size and marketability, are appraised at lower levels take your assessment to your local property tax assessor and have it reviewed. A detailed examination of all components is necessary when comparing assessments. What are the similarities and differences of your property vs. your neighbors? Are their differences in location, traffic, floor plans, materials used to build the home? Â Again, this is not tax avoidance, but a common maneuver taken by astute homeowners.
Photograph your property and other property’s in your area. Photographs offer physical evidence that can detail evidence or similarities between your property and others with lower assessed values. Look at the physical conditions of the exterior and foundations of the home, as well as the surrounding areas. Physical differences in these characteristics will yield varying property values. Tax evasion is not permissible for property taxes, but offering photographs to your property tax assessor can lower your assessed value.
Tax evasion is a fruitless effort in regards to property taxes. There is no way to avoid them. The government relies on such funds for public funding, schooling, and services. The steps listed above can help decrease your assessed value and thus lower the amount paid. When the evidence is compiled, and the investigation is concluded present the case to your local property tax assessor or your local governments review board for determining taxes.
Similar properties, in theory, should have equal or fair assessments. Do not attempt to commit tax avoidance or tax evasion, but instead, follow the above steps to lower your property tax payments.
