(Written by Jack Milarch – NMHBA EVP/CEO – Originally published in the December 2013 Housing Journal)
Property Tax on Partially Completed Construction?
At our most recent Government Affairs Committee meeting, some of HBA of Central New Mexico’s delegation brought up a problem of Bernalillo County’s proposal to start taxing partially completed construction. Subsequent investigation confirmed that this change in tax policy was being promoted by NM Tax and Revenue Department (TRD). A delegation of myself, Randy Traynor, Ray Gee, and Bret Bailey met with TRD Secretary Demesia Padilla and three of her staff last month to talk about the department’s (relatively) recent decision to pressure county assessors on this issue.
By way of background, all NM real property is taxed as of its value on January 1 of each year. Construction projects which are started and completed between January 1 and December 31 therefore would avoid taxation to the builder, assuming a sale prior to December 31. In contrast, under the new interpretation, a partially completed structure carried from one year into a new year would be assessed as a partially completed structure and incur property tax payable by the owner, which in many cases is the builder. Production builders with many homes under construction at any one time could incur a charge of many thousands of dollars. Our research has found that local interpretation of what the value of partially completed structures is varies widely, from no value to near-complete value, depending on the local assessor’s interpretation of the law. Tax bills on partially completed structures can be a few hundred to a few thousand dollars.
One of the arguments we made against this practice is that the policy could have the unintended consequence of builders strategically slowing starts so that fewer partially completed homes are carried over into a new year in order to avoid the builder incurring property tax liability. We told TRD we believed the time and effort required by county governments in trying to find and assess partially completed construction could be better spent in getting completed projects onto the tax rolls. Our experiences and observations are that the failure to get completed construction onto the tax rolls in a timely manner is a much bigger problem for the local assessors.
Also, in our reading of the relevant law on this issue, we believe that TRD has thin grounds for their opinion on this practice. We argued that incomplete projects that have no Certificate of Occupancy or final inspection are not legally habitable, and therefore have no market value. In addition, longstanding court cases forbid property tax assessors from speculating on the completed value of a partially completed project, which we believe is being done to value a partially completed building. We presented this to TRD, and they told us they didn’t agree.
We also discussed a second issue which has been reported by builders in some areas of the state, and that is the habit by some county assessors of bringing the entire structure up to current valuation and resetting the 3% annual increased valuation cap whenever remodeling is done on the property. In some instances this has reportedly been done for maintenance-like projects such as re-roofing. This practice creates a disincentive for people to remodel their homes, and again we believe this practice is not supported by our property tax law. We believe additions should be valued at full market value and simply added to the current value of the original property without impacting the valuation cap on the basic property. TRD officials had some sympathy for this problem and noted that “IF” this is going on property owners should protest and they believed such protests would be successful.
At the end of our meeting TRD officials said they would take into account our arguments and let us know if they would consider changing their directions to the county assessors regarding the taxing of partially completed structures. Once we hear from them, our leadership will review the situation and determine where to go from there. We are interested in your opinion of this issue, including whether you think it has been a problem in your area, and how big a problem this is to your company. Please email comments to Melanie@nmhba.org.