Does Remodeling Increase Property Taxes? The 2 Lines That Decide

William Reid (: 00:00

Okay, so here's a question that I get asked all the time and folks always want a clean yes or no. Does remodeling increase your property taxes? The honest answer is sometimes. And almost never the way you're picturing it. So today we'll walk the two lines you can cross without knowing they were there.

How the county actually builds your number, because it isn't what you spent, and it usually isn't the market value either, and what the whole thing costs you every year. Grab a notepad. Let's dig in.

Okay, let me set the scene for you here. My friends Ben and Jane, I've spoken about in past episodes. And just being really clear right up front, what happened to them wasn't dumb. It was completely normal. They did this right. Close to a year of planning, real drawings, a real contractor, a budget with an actual contingency in it. And if you've been listening to this show for a while, you know that is not a given. And they built a 400 square foot addition off the back of the house. A bedroom, a bathroom, a little sitting area by the window where Jane wanted to read in the mornings, and it came in close to budget. That is a genuine accomplishment.

But then about 14 months later, an envelope shows up from the county. And it's not the regular tax bill they've been paying for 11 years, it's a different one. Inside, there's a catch-up amount for the months since the addition was finished, and then a new annual number going forward. Their taxes went up a little over $2,200 a year.

Now, nobody did anything wrong here, and that's the part you can hold on to here. The contractor didn't hide anything, the architect didn't miss anything, the county wasn't out to get them. It was just a real cost of their project that never showed up on a single piece of paper anybody handed them or they even thought about or even knew about. And that's why people are starting to ask.

So over the 20 years Ben and Jane plan to stay in that house, that one invisible line is bigger than their appliance package, bigger than all their windows. It's one of the largest single items in the whole project. And it wasn't on any spreadsheet they ever looked at.

So here's my promise for the next half hour. First, I'll fix the question because the way most people ask this one walks them straight into a wall. Then the two lines that decide what happens to you, two offices that don't even speak the same language, and then how the county actually calculates your number. And I promise you it's probably not what you think. And then what it costs you every year and five questions with exactly when to ask them. None of this is complicated. It's just that nobody in your project has the job of telling you.

William Reid (: 02:47

Okay, so let's fix the question first because almost everybody comes at this one backwards. The way people ask it is how much value am I adding? They sit down with a calculator and figure, all right, I'm spending two hundred thousand dollars, so my house is worth two hundred thousand more. So I'm about to get taxed on two hundred thousand dollars. And then one of two things happens. Either they panic or they decide the whole thing is unknowable and quit thinking about it.

Both of those are expensive and they come out of the same bad question. Because in most places, a remodel by itself doesn't raise your property taxes at all. Crossing a certain line does. So let me start with everything that generally doesn't touch your taxes, because that list is a lot longer than a lot of folks expect.

Some of these might seem obvious, but I'm gonna say maintenance of your property doesn't. You replace your roof with a comparable roof. That's generally not a tax event. Same with your furnace and your water heater and your air conditioning. You're not making the house bigger and you're not making it fundamentally newer. You're keeping it alive. And in most places, swapping something out for a similar something is just upkeep. Upkeep is not what an assessor is looking for.

Paint doesn't. Landscaping generally doesn't, as long as you're not putting in permanent structures. And this next one surprises people the most. A lot of straight cosmetic remodeling doesn't either. New countertops, new cabinets, new flooring, refinishing what's already there. In a lot of places that work on its own is simply not what triggers a reassessment, and that's the terminology that you're gonna hear.

The shorthand I use is staying inside the four walls. So if you're not expanding the footprint, not adding living area, not adding bedrooms or bathrooms, and not doing deep structural work, this whole question is usually a non-event for you. But I want to be clear about that because there is a lot of fear out there on this topic. And most of it is aimed squarely at people doing kitchens and baths who were never going to have the problem in the first place.

Now, the other side of that list, the things that do get somebody's attention, are the ones that either make the house bigger or add something that wasn't there before. So room additions, second stories, converting a garage into living space, finishing a basement or attic so it becomes real heated square footage, an accessory dwelling unit, which is a whole conversation on its own, in ground pools in a lot of places, and major kitchen and bath work when it stops being cosmetic and goes structural.

So you see the pattern there. It isn't about how much money you spent. It's whether you made the house bigger or added something new or reached down into the bones of it. So if spending money isn't the line, then what is?

Well there are two of them and two different offices using two completely different tests. The first is your city or county planning and building department. And that one decides what your project is, whether the thing you're building is a remodel or whether it's legally classified as a brand new house. And the second is your county assessor. And that one decides what your house is worth for tax purposes and whether they're adding a number to what you've already got or starting over on the whole thing.

In a lot of counties, those two aren't really talking to each other about your project beyond a permit record moving from one desk to the other, which means you can be perfectly fine with one and get blindsided by the other. So let's take these one at a time.

Line one is the classification line. And I'll tell you this is where I have watched more budgets get killed than just about anywhere else in the design phase. It sounds strange the first time you hear it. Your remodel and addition project might be considered a brand new home in the eyes of your city. And I have a whole dedicated episode about project classification earlier in my library that you can hunt for. And I don't mean that as a figure of speech. I mean a new home with every rule that comes along with one.

This varies enormously around the country. Some places have no classification process at all. In others, it's the single biggest hidden cost in the entire design phase. So this is always a your city question. And here's the most common version of the test. If your new design increases the living area by more than 50%, the city can decide it's a new home.

So say you've got an: 1800

And what kind of rules? The planning approval process gets run as if you were building on a bare lot. The whole house has to conform to current zoning, including setbacks, even if the house you already own doesn't. The entire structure has to meet current building codes, not just the new part. Fire sprinklers throughout in a lot of jurisdictions, current energy and green building requirements, and those apply to the old part of the house, too.

So think about what that actually means. You wanted a bigger primary bedroom and now you're running a fire suppression system through a house that was perfectly fine on Tuesday. And I want to be clear about the scale of this too, because folks hear code compliance and picture some paperwork. It is not paperwork. Retrofitting sprinklers means opening up ceilings you had no plans to open and it can mean an upgraded water service from the street.

nding right where it is since: 1962

And then there's a harder version of this test, and it catches the folks who think they're safely under the 50% line. In a lot of Northern California cities, for example, and more and more elsewhere, you're not measuring what you're adding. They're measuring how much of the existing structure you're touching. Square footage and linear footage of materials being removed or affected, siding, roofing, exterior walls, interior walls, and flooring.

So under that method, you could add only 450 square feet, a pretty modest 25%, and still trip the threshold because you gutted and rebuilt everything else in the existing home. So that house only grew by a quarter, but you touched all of it. And that calculation gets involved in a hurry and it's your design professional's job to run it, not yours. Your job is to ask for it. So that's the idea today is to make you aware so that you can ask the right questions.

So what does being awake look like on line one? Well, ask exactly how your city applies the rule. Does the garage count? Does lot coverage play a factor? What's the measurement method? Then if you're anywhere near that line, ask your architect what it would take to come back under that threshold. It might be almost nothing. Instead of 2,700 feet, you could live with 2,650 because 50 square feet can turn out to be the most expensive 50 square feet you ever draw. And nobody's going to tell you that unless you ask.

And one more that surprises people, if you're blowing past that line anyway, take a hard look at what you're actually saving by keeping part of the old house standing. Sometimes a complete demolition is cleaner and even cheaper than a heroic effort to preserve a few walls that aren't buying you anything.

So now, line one is mostly a cost and code problem. It's a big one, but it's a construction cost problem. And those at least show up in somebody's bid where you can see them. Line two is different. And line two doesn't show up in anybody's bid.

William Reid (: 11:31

Okay, so line two lives over at the county assessor's office. And I'd say this is the one homeowners understand the least. Let's start with the good news. Because there is really good news here, and it's the thing that protects most people. Under normal circumstances, when you build an addition, the assessor values that new work and adds it to what you've already got. So your existing house keeps the number it was already carrying. They're not starting over on you. They're adding a room to the ledger, not rewriting the whole ledger. And that's the big deal.

In a lot of places, especially if you've owned your home a while, the value you're carrying on that old house is way below what it would actually sell for today. And that gap is money in your pocket every single year. And in the normal case, an addition doesn't touch it.

Now, here's where the line comes in. There's a point where the work stops being an addition and turns into something else. And different places describe it differently, but the idea is pretty consistent. When a renovation is extensive enough that that building has essentially been made new again, it gets treated that way. And the test isn't about how pretty it looks when you're done. It's structures and systems. Substantial changes to the framing, the foundation, the plumbing system, the electrical system, the kind of changes that reset how long that building is expected to last. It's not how nice does it look, it's how much longer will it last.

And if you cross that line in a lot of places, the assessor isn't just adding the value of the new work anymore. Some or all of that existing value can come off the books and go back on at today's market value. So that protective gap you were carrying on the old house, that can be gone.

So I'm going to hedge this properly and let's be straight about why. This varies by county. Sometimes by assessor, and every case gets looked at on its own. So I'm a builder, I'm not an appraiser, I'm not an accountant, and I'm sure not your attorney. But what I can tell you with real confidence is that this line exists in a lot of places. It is very real, and nobody in your project is going to bring it up to you unless you do.

And here's what makes it dangerous: listen to how homeowners talk about the exact project that lands closest to this line. We're taking it down to the studs. People say that with pride. It's a badge of honor. It means we're doing this right. We're not putting lipstick on it. We're fixing what's behind the walls. And I agree with them. Sometimes down to the studs is exactly the right call and I've recommended it plenty of times.

But understand what you just described. New framing where things are rotted. New plumbing throughout, new electrical throughout, maybe some foundation work. To your contractor, that's a thorough job. To an assessor, that same sentence can read like a building whose clock just got reset. So down to the studs is a construction term. And over at the assessor's office, it can be a reclassification.

And it's usually not an all or nothing. A lot of places handle this in degrees. So part of the existing value stays right where it was and part comes off and goes back on at current value, depending on how much of that building genuinely got made new. So it's a spectrum and where you land is a judgment somebody makes about your specific house, which means it's a question you can ask ahead of time. And I'll come back to how to make that call in a few minutes.

And notice something about these two lines together. They are not the same test. You could stay comfortably under your city's 50% rule and still do such deep structural work inside the existing footprint that you're in this conversation on line two, the assessor's. Or you could add a big clean addition that trips line one at the city and it gets treated completely normally by the assessor because you barely touched the old house.

So two offices, two tests, two answers. And exactly one person in this whole process is responsible for asking both. And I think you know who that is by now.

William Reid (: 16:07

All right, so now the question I get asked about this more than any other, and it usually comes out something like, Hey, Bill, are they going to reassess my house at what it's worth now? Or are they going to tax me on what I spent? Generally, the answer is no on both counts. So let me take you inside how this number gets built, because when I walk people through it, they're almost always surprised.

First thing to understand is that this is not an appraisal. Not the way you're thinking about one. When you refinance, an appraiser comes out, walks your house, pulls comparable sales in your neighborhood, and writes an opinion about your one property. That's not what's happening here. An assessor's office has to value every property in the county, sometimes hundreds of thousands of them with a pretty small staff. So they don't do it one at a time.

They use what's called mass appraisal. And it's basically a production line. Standardized tables and rates applied the same way across everybody. So similar houses come out with similar numbers. Nobody's walking your house with a clipboard pricing out your tile.

So where does that number come from? For new construction, most places start with what it would cost to replace that structure new. And they get that out of a cost schedule, which is a published table of construction costs. Square footage times a base rate for your type of construction, adjusted by a local multiplier for your area. Now sit with that for a second because it matters. Your construction contract is not the input. Your invoices are not the input. In most cases, they never even see any of that stuff. They're pricing your addition off of a table.

And that cuts both ways. If your project went over budget, that doesn't automatically raise your taxes. And if you got a great deal, that doesn't lower them either.

So now here's the piece that moves your number more than anything else. And most homeowners have never heard of it. It's called your grade or your quality class. The assessor classifies the construction quality of your building. Different states use different scales, but it's usually something like below average, average, good, high quality, superior, and then a top executive grade. And that grade is a multiplier on the base rate.

So let me give you a feel for how much it matters. I was looking at one state's published grade schedule, and on it, an average grade carries a factor of 90, and a high quality grade carries a factor of 148. Same square footage, same footprint. And the number moves better than 60% on grade alone. So your finishes do matter, just not the way you'd assume. It isn't what you paid for them, it's which bucket they put you in.

So then they take the depreciation off. And that's generally based on effective age, not the calendar year the house was built, which is exactly why that like new question matters so much. A renovation deep enough to reset the effective age resets the depreciation right along with it.

Okay. So now the part that answers the question most directly. And this is where folks are genuinely surprised. In a lot of the country, your assessed value is not market value at all. It's a legislated slice of it. Somewhere around half the states do assess at full market value, and there the two are meant to be the same thing. But in plenty of other states, there's an assessment ratio written into law. Your assessed value equals market value times some percentage.

And those percentages are all over the place. I know of states where an owner-occupied home is assessed at 40% of its value, others at 10%, 19%, a third, 40%, 50%. And on top of that, some states apply an equalization factor, a multiplier meant to bring different counties into line with each other.

So don't go thinking a low ratio means a low tax bill, because it doesn't work that way. The rate gets set against whatever base they're using. So if your state assesses at 10%, the rate is correspondingly higher. It comes out about the same. But it matters enormously for how you read your own assessment. If you're in one of those states and you look at that number and think, well, that's what they say my house is worth, you're reading it wrong by a mile. You have to divide it back out. Assessed value divided by the ratio gives you the market value the county actually believes. That's the number you compare to reality.

And I don't want to leave you thinking this is just all tables with no connection to the real world. These models do get tested against actual sales prices and assessors recalibrate. So it's cost derived, but market calibrated. It's not your cost and it's not a custom appraisal of your house. It's a model.

So what do you do with all that? Here's the most useful thing in this whole episode, and it takes about 20 minutes. Go get your property record card. Every assessor office has one for your property. And in most places, you can pull it up online or just ask. That card is what they think they know about your house. Square footage. Bedrooms and bathrooms, the year it was built, the effective age, your grade, whether you've got a garage, a basement, or a pool. Go read it. And I mean actually read it.

Because that card is very often wrong. I've seen square footage that was never right to begin with. I've seen a grade get bumped after a remodel when it shouldn't have been. I've seen finished basements on the card that don't exist and garages counted twice. And that is the most fixable thing in this entire conversation. You're not arguing about the market or the tax rate or anybody's opinion. You're pointing at a factual error on a form. Those get corrected all the time.

William Reid (: 22:25

Okay, let's put some real arithmetic on this because so far it's been mechanics and you can't really budget mechanics. And the number most people worry about is the wrong number. When that envelope shows up, homeowners fixate on the one-time catch-up bill. In a lot of places, when work gets finished partway through the year, you get a bill covering the gap between your old value and your new one for the rest of that cycle. It's real, it shows up at a lousy moment, usually right after you spent everything you had, and it feels like punishment. But that one is finite. You pay it and it's done.

The number that actually matters is the annual one because that comes back every single year for as long as you own that house. So let's see if we can shape this for you. And take this as a shape, not a quote for your house, because these vary wildly by state, county, and even different school districts across the country.

Across the country, the effective property tax rate on owner-occupied homes runs a little under 1% of value per year, but that average hides an enormous spread. There are states where it's about a third of a percent, and there's states pushing towards 2%. And you don't have to guess at yours. While you've got that record card out, grab last year's tax bill and divide what you paid by what you're assessed at. There's your real rate in your district with your school bonds baked in.

So back to Ben and Jane's 400 square foot addition. Say the market says that work contributed a hundred thousand dollars of value at around one percent. You're looking at roughly a thousand dollars a year. At the high end closer to two thousand. So now multiply that out. That's the step almost everybody skips. If you're staying 20 years, a thousand a year is twenty thousand bucks, two thousand a year is forty thousand bucks.

Forty thousand dollars on a project where you agonized over an eight thousand dollar cabinet upgrade. And that's why I'm giving you this whole episode. It's one of the biggest lines in a project. And it doesn't appear on a bid, a proposal, a budget, or a lender's worksheet. Not because anybody's hiding it. It's just not in anybody's scope of work to talk about that. It ultimately lands on you.

So a quick word on timing because it explains why this feels like an ambush when it isn't one. Most assessment systems take a snapshot of your property once a year on a set date. And whatever your house is that day is what gets valued for the cycle. So depending on when you finish, the new number might land right away or sit quietly for almost a year. That lag is exactly what Ben and Jane got. Fourteen months later when the project was a memory and the file was closed.

And how do they find out? Permits. Mostly moving from the building department over to the assessor's office. But that's not the only way. They also use aerial imagery, sales records, and periodic canvassing. And in many places, they have an obligation to value new construction, whether a permit got pulled or not.

I personally experienced this when I did a major renovation on one of my homes. And I got my reassessment bill in the mail and I was shocked. And it turned out that my project basically made the assessor reassess the entire home and I tried to argue it and I actually went in and talked with them. And they actually pulled out, I couldn't believe this. They pulled out a file with images of our project in different stages of construction. So they literally drove by the property during construction. I was floored that they actually did that. So it was a little hard to argue when I was telling them, Well, we didn't really do that. We really just did a big remodel and they said, Well, your house looks brand new. You've updated all of the systems. You've added this much square footage. So my entire property got reassessed. Not at full market rate, but still it was a pretty significant impact and surprise.

So this ties back to episode 62, which I talked about, which is called the cash trap. Don't let anybody talk you into skipping permits to dodge this. That is not a good tax strategy. Unpermitted square footage generally can't be counted in an appraisal. It can wreck an insurance claim and it will surface when you go to sell. You'd be trading a known annual number for an unknown problem at the worst possible moment. That's cutting your own throat. Pay the tax. Sleep at night. And when you go to sell your property, you can actually claim what the real size of it is.

So now one more thing about this number, and honestly, I think it's the most valuable thing in this episode. Here's something that happens constantly. A homeowner spends $200,000 on a project. The assessment lands and the assessor added $90,000. And the homeowner is delighted. I spent $200. They only got me for $90,000. I came out ahead.

Well, not exactly. What you got handed is something really valuable. And most people just file it in a drawer. Because remember what we just went through. They're valuing what the work contributes to your property, not what it costs you to build it. Those are two different numbers. And the gap between them is telling you something. That gap is a free appraisal. The market just looked at your $200,000 project and said, it's worth $90.

So back in episode 71, the three returns I talked about, we pulled apart the kinds of return you get on a project. Financial return, which is the resale, livability return, which is what it's actually like to live in the house now, and functional return, which is the problem the project solved. That framework is exactly the right tool for this moment.

Because if you did that project for livability, if Jane wanted a place to read in the morning light and now she has one, then ninety thousand of financial return on two hundred thousand spent is not a failure. It's a trade you chose to make with your eyes open. And I'll defend that choice all day long. You bought your life, not a return. This is data, not a verdict.

But if you did it because somebody told you it would pay for itself when you sold, then that number is the truth showing up about 18 months too late to do anything with. And that's my whole point. That opinion is knowable during design while the drawings are still soft and cheap to change.

William Reid (: 29:15

There's an old idea in appraisal that once you overimprove a property relative to its market, the extra doesn't come back to you. It isn't that you did anything wrong. It's that the neighborhood has a ceiling and you built right through it. And sometimes that's absolutely worth doing on purpose. If you're gonna be there twenty five years, the market's opinion matters a lot less than yours does.

What I don't want is for you to find out by accident from an envelope after the fact.

William Reid (: 29:49

Okay, so let's try to make all of this usable. Five questions. And the timing matters just as much as the questions do. So I'll tell you when to ask each one.

Question one is for your architect or your designer during schematic design before anything gets locked in. Does this design cross our city's classification threshold? And how close are we? Ask for the actual measurement method your city uses. And ask whether the garage counts. And if you're close, ask what it would take to come back under.

Question two is for the county assessor's office, also during design. And this is the call that a lot of people don't make. They're a public office. They answer questions. And they're generally a whole lot friendlier than people expect. Describe your project honestly. An addition of this size, this much work inside the existing house. Ask whether that scope gets treated as an addition to your existing assessment or whether it puts you into new territory. And you're not tipping anybody off. They'll see the permit anyway. You're choosing to find out now, while you can still change the drawings instead of 14 months from now when you can't.

And then question three, ask them what's specifically excluded where you live. Maintenance, like for like replacement, repairs after a fire or a flood. There's usually a real list, and it's usually more generous than a lot of homeowners would assume.

And then question four, and I really want you to write this one down, ask what relief exists and whether you have to apply for it or whether it's automatic. This one is quietly worth a lot of money and it varies enormously, which is exactly why you have to ask instead of assume. In some places, there are home improvement provisions that hold a chunk of the added value off the rolls for a few years. I know of counties where something on the order of $75,000 of added value gets shielded for about four years on an owner-occupied home.

Some places apply it automatically once the permit crosses the assessor's desk. In others, you have to file for it. And if you don't, nobody is calling you up to remind you that you just left money on the table. That can be several thousand dollars for the price of one phone call or one form. And there's also relief in a lot of places for rebuilding after a fire or a flood or an earthquake. If that's your situation, ask specifically and ask early because those programs often have their own deadlines too.

And while you've got them on the phone, ask one more. Is there anything about this I should be asking you that I haven't? That question has gotten me better information out of public offices than any other one I know.

And then question five. Question five isn't for anybody else, it's for you. Put the annual number in your budget as its own line item and multiply it by how many years you intend to stay in the house. Not the one-time bill, the annual number times your horizon. Once it's sitting on the page next to everything else, you can actually make a decision about it.

And one last thing, because I never want this show to make you suspicious of your own team. Your architect is not hiding this from you. Your contractor is not hiding this from you. It is genuinely not in either one's scope. And in 35 plus years, I've watched a lot of excellent professionals simply never get asked. The moment you do ask, most of them will help you right away. And the good ones will be glad you brought it up. Ask before the drawings are locked. Every one of these questions is free right up until the day it isn't.

All right, so let's bring this all the way home for you. A remodel by itself usually doesn't raise your property taxes. Crossing a line does. Line one is your city deciding whether your remodel is legally a new house. And that's mostly a code and cost problem. Line two is your assessor deciding whether you're adding the new work to your existing value or starting fresh on the whole building. And that turns on structure and systems, not on how it looks.

The number itself comes off cost tables and a quality grade, not off your invoices. In a lot of states, it's a legislated slice of market value rather than market value itself. What matters is the annual figure times the years you'll be there. Go get that answer during design instead of in the mail.

And you can always go deeper on this topic and many other topics that I cover in my book, The Awakened Homeowner, that's available on Amazon.com. And you can go to The Awakened Homeowner website where I have blog articles that expand even more on these topics. And if you want to learn more about Ben and Jane and the McMillans, there's always the Tale of Two Homeowners story, which is fun to read, about a comparison contrasting experience between two different homeowners.

And don't forget, I am building this platform called BuildQuest. And this is a pretty good example of why. This is exactly the kind of number that belongs in your budget from the very beginning instead of showing up in your mailbox. It's in development. I'm getting really close to completion. And if you'd like to be among the first people to go in, just go to buildquest.co and sign up for early access. There's a form right there on the site and there's no cost, there's no commitment.

And feel free to write me if you've been through a reassessment or you're staring one down right now, or if you're actually a tax accountant or professional in this area. I'd love to maybe do a follow up episode if you have even more information or want to correct me for what I said today. I'd really like to hear about it because your questions are where a lot of these episodes come from. And the email address is in the show notes. And I mentioned probably at the beginning of the episode and at the end here I've got a phone number you can now call in and just leave a message with your questions and I'll create an episode out of them.

So here's the next one we're gonna get into. We're going right to the office where all of this starts. Approvals and permits. What actually happens to your drawings after you hand them in? How long it really takes, and why the answer you get depends so much on how you walk in the door.

So until then, I'm Bill Reid your home building coach. Enlighten, empower, protect. Now go make it happen.

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