You may not be the only one who’s thrilled with your new family room addition. The tax assessor probably is too. When a home renovation increases a house’s value, it often follows that property taxes rise too.
Last year, the nation’s $214 billion remodeling boom helped to fuel a 4 percent increase in the amount of property taxes paid to local taxing bodies in 2002–although soaring prices of homes accounted for much of the increase.
It’s a cost that homeowners need to consider when budgeting an improvement project. But how do you assess how a renovation might affect your tax bill?
People used to assume that only improvements that boost a home’s square footage will result in a property tax hike. Not so, explains Maura Kownacki, spokeswoman for the Cook County Assessors Office. The assessment is based on the value of the improvement, whether it’s adding a room or merely redoing a bathroom.
Cook County multiplies the market value of a home by 16 percent to determine its assessed valuation, so a $45,000 improvement would in theory boost the assessed valuation by $7,200, and property taxes would increase by about $1,440.
However, not all improvements result in a higher assessment. Repairs after weather damage and routine upkeep, such as repairing or replacing roofing material or sidewalks or adding insulation, won’t catch the assessor’s eye. Neither will cosmetic changes such as new paint, siding or landscaping, new kitchen cabinets or a new bathroom floor. An aboveground swimming pool or swing set wouldn’t spark a reassessment, either.
When can you expect to pay?
In Illinois, when improvements boost a property’s assessed value, the higher valuation doesn’t appear on tax bills right away. The Home Improvement Exemption allows homeowners to exempt $45,000 of a remodel for four years.
That means that with a $100,000 addition, only $55,000 would immediately be tacked on to the market value of the home, resulting in a $8,800 boost in assessed valuation. The remaining $45,000 worth of improvement, or $7,200 in assessed value, would appear on the tax bill in four years.
That’s good news for homeowners, but perhaps not for people who purchase a freshly remodeled home. They’re often shocked when they get a higher-than-expected tax bill.
“Usually the surprise happens when the (remodeled) home changes hands,” said Craig Dovel, supervisor of assessments for DuPage County. “When the property changes hands, it can be sticker shock for new owners.”
Property taxes follow the property, not the owners. “It’s important for buyers to investigate the tax bill,” Dovel added.
Effective tax year 2004, the home improvement exemption increases from $45,000 to $75,000. The increase is part of a property-tax relief legislation that was signed in July by Gov. Rod Blagojevich. The legislation also caps assessment increases to 7 percent a year, increases the statewide homeowner exemption amount to $5,000 from $4,500 in Cook County and $3,500 in other Illinois counties and increases the senior exemption to $3,000, among other changes. Individual counties would be free to adopt or not adopt the bill as their boards see fit.
In Cook County, the 7 percent cap is effective this tax year and exemptions other than home improvement exemption will appear on fall 2005 tax bills, says Kownacki.
Evanston resident Janice Sachen lauds the increase of the home improvement exemption. “I think $75,000 is a godsend for anyone who wants to remodel,” she said. “If you’re just doing your kitchen, you will have exempted your entire kitchen,” she said.
Sachen speaks from experience. In 1992, she put a $130,000 addition onto her single-family home. The exemption saved her $500 on her tax bills for four years, and when it expired, “the increase was not surprisingly large,” Sachen said.
Improvements also may boost homeowners insurance premiums. Sachen’s insurance increased with the rise in her home’s value, and she worked with her insurance agent and contractor to come up with a replacement value for the home.
Building in costs
Planning upfront, like Sachen, can save some headaches when the tax bill arrives.
First, decide what really needs to be done in your home. “People improve their homes for two reasons–because they’re planning to sell or they want more or a different kind of space,” said Richard Roll, president of the American Homeowners Association, a Stamford, Conn.-based consumer advocacy group. He recommended that homeowners sink dollars into cosmetic improvements, such as new cabinets or new flooring, that won’t result in a higher assessment but will improve a house’s curb appeal.
If extensive work is in order, be sure to get the right permits, even though applying for a permit is what usually tips off the assessor’s office that an improvement is in the works. Reputable contractors won’t start a project without a building permit, says Chicago-based contractor Don Van Cura. Contractors can file for them, but homeowners can often do the job faster because they can apply at one of the city’s four satellite offices, he adds.
Permit fees range from $35 for a new garage to $100 for electrical work; permits for major remodels can cost thousands of dollars because separate permits must be issued for each type of work involved.
Failure to file building permits is tricky business, said Sabrina Miller, spokeswoman for the City of Chicago’s Department of Construction and Permits. While the city might not “catch” you building without a permit, a disgruntled neighbor might call the city, resulting in a visit from an inspector. A stop-work order and fines would most likely follow, “and you have to get a permit in the end,” Miller noted.
While you’re filing for the permits, ask the assessor’s office if your home qualifies for any special exemptions. In Chicago, for instance, historic bungalow owners are eligible for a tax credit for some improvements.
In Cook County, you’ll automatically receive the home improvement exemption when there’s a field check of the building permit for your improvement. After the field check is done, homeowners will receive a notice, Kownacki says.
Some exemptions might end up putting the tax balance in your favor. That’s what happened to Jefferson Park resident Mary B. Cipolla. For Cipolla, 84, the prospect of an improvement-related bump in taxes was so insignificant that she didn’t even apply for it.
Cipolla added about 1,000 square feet to her Cape Cod home two years ago; due to a senior exemption, the tax jump amounted to about 5 percent.
“I expected them to go up a lot more,” Cipolla said.
Thanks to the $350,000 remodel, her house has three large bedrooms, a master bedroom with bathroom and laundry room, and even an elevator.
Because the replacement value of the house rose, Cipolla’s homeowners insurance did as well, but again, not as much as she expected.
Contesting a tax bill
If, despite research and planning, your property taxes do rise, keep in mind that you can always challenge a reassessment. There’s an effective way to do so, said Jane Lavelle, a real estate attorney at Finkel, Martwick and Colson in Chicago.
First check the assessed valuation of your home. If you paid $300,000 for it and the assessor has set its market value at $350,000, you might have a basis for a complaint. An inaccurate physical description of your property (such as describing your home as two-story when it’s really a one and a half) might also prove basis for a challenge.
If you decide to challenge, research “like-kind” properties in your area. That means making an exact match, Lavelle cautioned. Properties are classified according to a digit-dash-two-digit code (for instance, 2-04). The “2” means residential; the two-digit series describes a type of home. If your home is an “04,” you must research other “04” homes to make a comparison.
“It doesn’t matter if you rationally know (your house) is similar to another; if it’s not the same code, don’t compare it,” she said. “Make it as easy for the assessor’s office as you can.”
A challenge might take a lot of work, but if done right, can result in a reduction. “They’re not trying to not grant reductions,” Lavelle said of the assessor’s office. “They’ll do it if (the challenge) is properly presented, so do it right.”
