Thursday, February 18, 2010

Property taxes and foreclosure or short sale

A question was asked in class about whether foreclosure or short sale may sometimes increase property tax revenues.

Theoretically, the answer is yes. In many states, the annual growth of assessed property value cannot go beyond a cap, for instance, 2% in California, except when a property is sold. In normal economic situations, this causes the property tax base to grow at a slower rate than the market value.

When homes go to foreclosure or short sale, however, they are forced to change hands. Hence they will be reassessed according to the market value, leading to a new assessed value that might be higher than the original assessed value before the turnover. This is more likely to happen when a foreclosed house has been owned for a long time, so that the growth of assessed value has lag behind substantially than that of market value.

In practice, though, in the recent housing crisis a high percentage of foreclosed houses may be purchases just several years before. So it may be rare to see the assessed property value goes up after a house is forced to turnover due to mortgage problems.

Here is a related discussion by Professor Mark Skidmore in Michigan State University, "Property Taxation and Foreclosure in Michigan."

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