New Jersey Property Tax Laws & Regulations PDF

New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 1 of 26 NEW JERSEY PROPERTY TAX LAWS AND REGULATIONS VALUATION READING ASSIGNMENT: HANDBOOK FOR NJ ASSESSOR CHAPTER 6...

New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 1 of 26 NEW JERSEY PROPERTY TAX LAWS AND REGULATIONS VALUATION READING ASSIGNMENT: HANDBOOK FOR NJ ASSESSOR CHAPTER 6 APPRAISAL MANUAL FOR NJ ASSESSORS PAGE TABLE OF CONTENTS 1 OBJECTIVES 2 Narrative Reading 3 Class Exercise – Units of Measure and Market Value 6 Study Questions 8 Study Questions – Solutions 10 Excerpt from NJ Appraisal Manual 13 Page 1 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 2 of 26 OBJECTIVES SECTION SIX 1. Know the appraisal process. 2. Know the three approaches to value. 3. Calculate a tax rate. Page 2 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 3 of 26 Narrative - Valuation - Assessment and Taxes Local Property Tax Local property tax is based on the relationship of the value of real property known as the assessed value and budget/levy, the amount to be raised by taxes. A simplified example of the relationship is as follows: Total (aggregate) Assessed Value of Real Property = $5,000,000 Total Budget = $200,000 Revenue from other sources = $ 75,000 (subtract from Total Budget) Residual Amount to be raised by taxes = $ 125,000 Tax Rate is calculated by dividing the budget by the total assessed value 125,000 divided by 5,000,000 =.025 or $2.50 per hundred The tax rate is then applied to the assessed value of each property to determine the taxes. Assessed value = $140,000 Tax rate =.025 = tax rate expressed as a decimal Taxes = $ 3,500 In NJ the more your property is worth, the more tax dollars you are required to pay toward the budgets of the county, the municipality, and the school districts, maybe even fire districts, open space, etc. The municipality acts as the collection agent for the tax dollars supporting all those budgets. Legal Basis for Assessment and Collection of Taxes for Support of Local Government The NJ Constitution and Statutes provide the legal basis for assessing real property. The NJ Constitution specifies the “same standard of value”, and the statutes further specify that the value should be MARKET VALUE. The statutes also charge the assessor with annually determining the market value of each property on October 1 of the pretax year. The NJ Constitution directs that the taxes collected are to support local government. To meet the Constitutional and Statutory standards of value, the tax assessor is responsible for determining the market value of the real property and expressing the value in terms of assessed value to maintain a uniform level of assessments. Valuing Real Property for Assessment Purposes - Overview The valuation process is a systematic, orderly process that addresses a valuation problem and leads to conclusion by stating the value which is the solution to the problem. There are three accepted approaches to valuing real property: the market approach, the cost approach and the income approach. Whenever possible, an appraiser uses all three approaches to value, followed by a reconciliation stating the value conclusion. Page 3 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 4 of 26 All three approaches to value attempt to interpret the thinking of buyers and sellers. Each value estimate must include the entire valuation process: The Appraisal Process  Definition of the Problem  Preliminary Survey  Data Collection and Analysis  Highest and Best Use Analysis  Application of the Three Approaches to Value  Reconciliation and Final Value Estimate The Market Approach and Cost Approach are covered in detail in Fundamentals of Real Property Appraisal- IAAO Course 101. The Income Approach is covered in detail in the course Income Approach to Value – IAAO Course 102. Regardless of the actual method used to develop the value, the assessment is representative of market value of a fractional portion of market value. In the background of the valuation of real property are the principals of value (why does something have value), the limitations placed on real property development and ownership by government (physical characteristics, eminent domain, police power-zoning, and escheat), the actions of buyers and sellers on the open market and the influence of by supply and demand. The sales or market approach is based on the presumption that sales of properties very similar (comparable) to the subject property are indicative of what it would sell for. This approach can be used on all types of properties. Selected sales should meet the criteria of first being an open market arms-length transaction between a willing seller and a willing buyer; they should be recent and comparable. Various methods have been developed in order to adjust sales for time, location, property age, etc. For certain types of property, especially condominiums, this approach is most helpful because typically many properties are similar. Essentially the market approach expects one group of people, buyers and sellers in the future, to repeat what was done in the past. The cost approach is based on the premise that the market value of the land plus the cost to reproduce or replace an existing structure will equal the market value of the property. It is really a hybrid approach. The process begins by valuing the land as if it were vacant and adding the cost to replace the building. The third approach to value is the income approach, also named capitalization. This approach requires the appraiser/assessor to determine either the existing income stream (rental income) from the real estate, or presumes a likely stream in the case of new or vacant property that is intended to produce income. This income stream is then capitalized to reflect a market value. Capitalization is accomplished by applying a rate to the income to determine the value. The basic formula is IRV. Income divided by rate equals value. There are several ways to derive a capitalization rate, and the income needs to be reviewed and analyzed to determine that it is representative of market rental income. Appraisal Manual for New Jersey Assessors Page 4 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 5 of 26 The Appraisal Manual can be found at: http://www.state.nj.us/treasury/taxation/lpt/referencematerials.shtml The Manual explains the legal basis for assessing, land value formulas, units of measure, descriptions of use of the manual, descriptions of data characteristics and calculation procedures. Included in the Manual are the actual cost figure components for residential structures, out buildings, farm buildings, billboards, and solar systems. Structures are stratified into building classes. Each building class includes costs base specification and adjustments for additional components. The manual includes appraisal procedures, various volume formulas and a glossary. The manual was revised and republished in 2021 based on the 2001 costs. A cost calculation factor is used to revised base costs to current costs. Land Value Land is valued using the market approach. Land is valued as if it were vacant. There are six difference methods of valuing land and all use some sales information. The method should be selected based on the type of land being valued. In addition to the method used to develop the value, the assessor must determine the correct unit of measure based on the type of land being valued. The units of measure include front foot using a depth factor, acreage for valuing large tracts, site value plus overage seems to best value suburban lots such as cul-de-sacs and even square foot for very small parcels. Land value methods covered in the Manual include: Sales Comparison Allocation Abstraction Capitalization of Ground Rent Land Residual The sixth method is the developmental method. Market Approach Property Value Market Approach involves a direct comparison between properties (comparables) that have recently sold as they are usually the best indicator of market value and a subject property. The appraiser (assessor) collects the data and verifies the sales. For assessment purposes the appraisal (assessing) date will always be October 1 of the pretax year. The sales need to be analyzed and the characteristics charted. The sales used should have similar characteristics – i.e., be in the same neighborhood, same or similar land size, the improvements should be same style or same functionality, similar in square foot of living area – etc. The characteristics of the comparables are adjusted to be like the subject property. Adjustments may be found using paired sales analysis or adjusted paired sales analysis. See Example. Cost Approach The value determined by the cost approach is based on the building classification: residential, commercial, industrial, or agricultural and the construction type – the materials used in the construction. Buildings are classified by design, material, and workmanship. Floor area, building shape and story height are also considered. Because the costs calculated from a manual Page 5 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 6 of 26 reflect a replacement cost new, a depreciation factor must be applied to reflect the current value based on the condition. There are charts for the age of the property based on straight line depreciation. Some homes are so well maintained that their age doesn’t tell the whole story. A well-maintained older home might be more valuable than a poorly maintained newer structure. When buildings are maintained, the chronological age is not appropriate to use to calculate depreciation. Aassessors works with “effective age” – the age based on the condition rather than the chronological age. There are three recognized types of depreciation: physical, function, and external. Some are curable, while some are not.  Physical depreciation is the wear and tear: the house or commercial building has an older roof, needs a new furnace or HVAC system, and shows its age.  Functional depreciation is the lack of an item that is noted in the market or older less efficient items that need to be upgraded. The following may be considered functional depreciation. A house with 4 bedrooms and only 1 bath. An office building with three stories without an elevator. An floor plan with a layout that requires a person to walk through one bedroom to get to another.  External depreciation results from issues that come from outside the property itself: busy traffic, deteriorating neighborhoods, a water tower across the street, high tension lines. In some cases, especially in physical depreciation, the cost of curing the problem can be result in an increase in market value. The cost of curing functional depreciation might be prohibitively expensive. External depreciation can rarely be cured. These problems are reflected in a lower market value. Page 6 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 7 of 26 CLASS EXERCISE – UNITS OF MEASURE AND MARKET VALUE There are four parcels of land: Parcel 1 50x200 Sold for: $100,000 Parcel 2 100x200 Sold for: $225,000 Parcel 3 250x200 Sold for: $400,000 Parcel 4 500x200 Sold for: $700,000 Calculate the Front Foot, Square Foot and Acreage for each parcel. Parcel 1 Parcel 2 Parcel 3 Parcel 4 Front Foot Square Foot Acreage Calculate the Price per Front Foot, Square Foot and Acreage for each parcel. Parcel 1 Parcel 2 Parcel 3 Parcel 4 Price/Front Foot Price/Square Foot Price/Acre Determine the mean and median for each unit of comparison. Mean Median Front Foot Square Foot Acre Page 7 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 8 of 26 SOLUTION CLASS EXERCISE – UNITS OF MEASURE AND MARKET VALUE There are four parcels of land: Parcel 1 50x200 Sold for: $100,000 Parcel 2 100x200 Sold for: $225,000 Parcel 3 250x200 Sold for: $400,000 Parcel 4 500x200 Sold for: $700,000 Calculate the Front Foot, Square Foot and Acreage for each parcel. Parcel 1 Parcel 2 Parcel 3 Parcel 4 Front Foot 50 100 250 500 Square Foot 10,000 20,000 50,000 100,000 Acreage.30.46 1.15 2.96 Calculate the Price per Front Foot, Square Foot and Acreage for each parcel. Parcel 1 Parcel 2 Parcel 3 Parcel 4 Price/Front Foot $2,000 $2,250 $1,600 $1,400 Price/Square Foot $10 $11.25 $8.00 $7.00 Price/Acre $333,333 $489,130 $347,826 $236,486 Determine the mean and median for each unit of comparison. Mean Median Front Foot $1,812.50 $1,800 Square Foot $9.06 $9.00 Acre $351,694 $340,580 Page 8 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 9 of 26 Also presented in the manual are textbook calculations for calculating area and value for lots of varying sizes and shapes: Corner Influence – page 31 Alley Influence – page 32 Industrial Land – page 32 Unsubdivided Land – page 32 Rules for lots of various shapes and sizes Pages 33 – 44 Rectangular Rear-rectangular Parallelogram Triangle Lot base on the street – 65% Triangle Lot apex on the street – 35% Trapezoid right angle to the street Trapezoid parallel front and rear Irregular lot Curved Lot Business Through Lot Business Corner Lot Triangular Corner frontage on 2 streets Cost Approach Reproduction Replacement Historical Trended Historical Four categories of estimating cost Quantity survey Unit – in – place Comparative Unit Trended Historical Cost THE NJ APPRAISAL MANUAL  UTILIZES THE UNIT-IN-PLACE AND COMPARATIVE UNIT METHODS.  PROVIDES FOR THE REPLACEMENT COST FOR BUILDINGS OF SIMILAR TYPES OF CONSTRUCTION  PROVIDES FOR CLASSIFICATION OF TYPES OF BUILDING BY CLASS UNIT COSTS ARE PROVIDED FOR THE FOLLOWING BUILDING CLASSES:  SINGLE FAMILY  SEMI-DETACHED DWELLING  ROW-TOWN HOUSE Page 9 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 10 of 26  TWO-TO-FOUR FAMILY APARTMENTS  MOBILE HOMES  FARM BUILDINGS BUILDING COSTS ARE DEVELOPED ON THE BASIS OF COSTS OF LABOR AND MATERIALS BASE UNIT REPLACEMENT COSTS AND VARIATIONS ARE CALCULATED FOR AREA OR VOLUME: IE – DOLLARS PER SQUARE FOOT UNIT REPLACEMENT COSTS ARE BASED ON AVERAGE PRICES OF MATERIAL, LABOR, AND OTHER CONSTRUCTION ITEMS THROUGHOUT NEW JERSEY AS OF OCTOBER 1, 2001. COST CONVERSION FACTORS ARE CALCULATED TO REFLECT UPDATES IN MATERIAL COSTS AND LABOR RATES BUILDING CLASSIFICATIONS – are based on quantity, quality and types of materials and quality of workmanship that determine construction characteristics *Actual value determinations may dictate a classification shift up or down. BASE SPECIFICATIONS include the following items  ROOF  FOUNDATION - ASSUMED TO BE A CRAWL SPACE – ADJUSTMENTS ARE PROVIDED FOR BASEMENT AND A SLAB FOUNDATION STRUCTURE  FLOORS  PLUMBING  ATTIC- unfinished NONE of the following are included in the base specifications.  BASEMENT - SLAB  HEATING  FIREPLACE  PORCHES AND DECKS  GARAGES  OTHER ITEMS BUILDING CLASSES R-12 LOW QUALITY MATERIALS AND WORKMANSHIP SINGLE FAMILY DWELLING – minimum square feet on 1st floor are 400 square feet – must have 1 3-fixture bath and low-quality range and oven to be considered a dwelling – maximum square footage on first floor 1300 SQFT. Base specifications allow for a minimum 200 to 1300 square foot second floor. R-13 FAIR QUALITY MATERIALS AND WORKMANSHIP SINGLE FAMILY DWELLING - minimum square feet on 1st floor is 400 square feet – must have 1 3-fixture bath, kitchen sink, water heater, laundry tub, rough-in and a fair range and oven to be considered a dwelling – maximum square footage on first floor 1400 SQFT Page 10 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 11 of 26 Page 11 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 12 of 26 STUDY QUESTIONS 1. Size and shape affect the cost of constructing a building. Calculate the wall ratio for a one story rectangular industrial building that measures 100 ‘ X 400’. a..40 b..70 c. 2.5 d. 14 2. You are analyzing the sale of a commercial lot that measures 200’ X 400’. The sales price for the parcel was $80,000. You have determined that the best standard of comparison is square foot value. What is the square foot value of land based on this sale? a. $1.00 per square foot b. $10.00 per square foot c. $100.00 per square foot d. $400.00 per square foot 3. You are analyzing the sale of a commercial lot that measures 200’ X 400’ and 400 ‘ is the standard depth for the area. The sales price for the parcel was $80,000. You have determined that the best standard of comparison is front foot value. What is the front foot value of land based on this sale? a. $100 per front foot b. $200 per front foot c. $400 per front foot d. $800 per front foot 4. Mr. Jones is a mason by trade. He has decided to improve his own home with a new patio. The patio will measure 12 feet by 9 feet and it will be 6 inches thick. Concrete is sold by the cubic yard. How may cub100ic yards of concrete will Mr. Jones need to construct the deck? a. 2 cubic yards b. 6 cubic yards c. 9 cubic yards d. 54 cubic yards 5. Depth Chart – 4-3-2-1 Your standard depth for this area is 120’. Create a depth chart in 10 foot intervals. You have four known points at 30’ intervals. (120/4=30) Page 12 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 13 of 26 6. Depth by Market You have the following sales in a neighborhood where the lots have varying depths because they follow the creek bed. Develop factors for 10 foot intervals if 100 is the standard. Lot Size Sales Price 4 60 x 100 $100,000 7 60 x 120 $120,000 8 60 x 130 $130,000 10 60 x 150 $140,000 12 60 x 160 $145,000 18 60 x 180 $150,000 Page 13 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 14 of 26 SOLUTIONS 1. 100x400 = 40,000 100+100+400+400 = 1,000 40,000/1,000 = 40 2. 200X400 = 80,000 $80,000/80,000 = $1/sq ft 3. $80,000/200 = $400/ff 4. 6 in / 12in =.5.5x12x9/27 = 2 5. Depth Chart – 4-3-2-1 Feet Factor 100% 120 1.00.10 110.97 100.93 90% 90.90.20 80.83 70.77 70% 60.70.30 50.60 40.50 40% 30.40.40 20.26 10.13 0 0 Page 14 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 15 of 26 6. Depth in Feet Factor 180 1.50 170 1.48 160 1.45 150 1.40 140 1.35 130 1.30 120 1.20 110 1.10 100 1.00 Page 15 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 16 of 26 APPRAISAL MANUAL FOR NEW JERSEY ASSESSORS The appraisal manual Page 16 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 17 of 26 EXCERPT FROM NJ APPRAISAL MANUAL Page 17 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 18 of 26 Page 18 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 19 of 26 Page 19 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 20 of 26 Page 20 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 21 of 26 Page 21 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 22 of 26 Page 22 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 23 of 26 Page 23 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 24 of 26 Page 24 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 25 of 26 Page 25 2022 New Jersey Property Tax Laws and Regulations Appraisal Manual for NJ Assessors Valuation Page 26 of 26 Page 26 2022