I saw a headline that property taxes would decrease 18%, I was skeptical to say the least and you should be too. Colorado is unique in how property taxes are calculated requiring a balance between commercial and residential property taxes, with commercial values falling for the first time in recent memory, will this actually lead to a massive tax cut for residential property owners? Don’t get too excited! Unfortunately, there was a major flaw in their calculation; the reality is much different. Your property taxes will be going up, just how much is up to you.
Colorado’s price appreciation
Over the last 5 years Colorado has appreciated 56% (source FHA); this is for the entire state of Colorado including metro and rural areas. Since 1991 Colorado has appreciated 380%. In Denver comparing August 2019 to August 2020, the average sales price is up 15.1%.
Why is this important? Colorado is a desirable place to live and work which has attracted companies and relocators which has driven up the value of Colorado real estate. These trends look to not only continue, but accelerate over the next five years as urban flight brings people to less dense markets like Denver, the front range, and the various resort communities.
How do property taxes work in Colorado?
For years now, the residential assessment rate, which determines how much homeowners pay in property taxes, has fallen in order to offset booming home prices along the Front Range. This time around, the coronavirus-induced economic shutdown will add a new variable to the Gallagher equation: the collapse of the oil and gas industry.
Under Colorado law there are amendments that govern how taxes are calculated. One of the major drivers of taxes is the Gallagher amendment. The Gallagher Amendment is like a balancing scale with two arms. On one side are residential property values. On the other, non-residential values, such as commercial properties including minerals, like oil and gas. Residential property values can’t exceed roughly 45% of the statewide tax base whereas commercial properties account for the additional 55%. When home values rise, or non-residential values fall, it tips the scales out of balance, and residential taxes are cut. The inverse can also occur with commercial property values dropping causing the scale to once again tip out of balance.
In the 2021 assessment cycle, oil and gas values are expected to drop by 36%, and commercial values are projected to drop 20%, according to Tuesday’s report from the Division of Property Taxation. These projections could be optimistic. Think of an office building or large big box retailer that is now vacant due to the virus, the value of that property could be closer to 40-50% less.
On the flip side, residential property values, which have held steady/moderately increased, are projected to increase 10-15% over the last assessment from two years earlier which will further tip the scale.
Will residential property taxes fall?
As commercial property values along with the values of minerals plummet. This would theoretically cause the residential assessment rate to fall from 7.15% to 5.88% during the next reassessment cycle. According to the media and sponsors of the Gallagher repeal this represents a nearly 18% drop in residential property taxes, the largest cut since it fell by 19% in the 1995-96 assessment cycle, and the second-largest cut in the history of Gallagher, which was adopted by Colorado voters in 1982. Unfortunately the reality is far different.
Why will your property taxes actually increase?
Unfortunately, there is another piece of the equation, residential property values. Let’s do a quick analysis. Below is a quick calculation, the first assumes that properties increase 10% from the 19 to 2021 cycles (5% a year on the low side), the second is a 20% increase (10% a year is more realistic), and the third is a 30% increase (15% a year) which is what we are seeing in the resort communities (Breckenridge, Vail, Crested Butte, Steamboat, etc… As you can see in 2021, the savings are minimal if there are any at all based on appreciation, for example in Denver, houses have been appreciating by over 10% the last two years. In Denver the savings might be around 1.3%, in the mountains, due to the appreciation, taxes will still increase 7%.
** the reason I chose 2019, 2021 and 2023 is that Colorado revalues property every odd year.
| Property value | assement rate | assessed valuation | Mill Levy | taxes | % change | ||||
| 2019 | 500000 | 7.15% | $ 35,750 | 0.0812 | $ 2,901 | ||||
| 2021 (5%/year) | 550000 | 5.88% | $ 32,340 | 0.0812 | $ 2,625 | -9.54% | |||
| 2021 assume (10%/year) | 600000 | 5.88% | $ 35,280 | 0.0812 | $ 2,863 | -1.3% | ** Denver | ||
| 2021 assume (15%/year) | 650000 | 5.88% | $ 38,220 | 0.0812 | $ 3,102 | 7% | ** Mountain communities | ||
What happens in the next cycle 2023?
This is where things start to get interesting, Gallagher has basically helped cap huge increases in property taxes due to appreciation in values. Even with Gallagher your taxes will increase substantially, if you are in a very remote market with basically no appreciation, you might be lucky, but in any of the more populated markets in Colorado, your taxes are going up big time.
| Assume keep Gallagher | % change from 2019 | ||||||
| 2023 (5%/year) | 600000 | 5.88% | $ 35,280 | 0.0812 | $ 2,863 | -1% | |
| 2023 assume (10%/year) | 700000 | 5.88% | $ 41,160 | 0.0812 | $ 3,340 | 15% | |
| 2023 assume (15%/year) | 800000 | 5.88% | $ 47,040 | 0.0812 | $ 3,818 | 32% | |
What happens if Gallagher is repealed?
Hang onto your saddles and house! Your taxes will increase substantially if Gallagher is repealed. Below is a calculation based on the appreciation through 2023 assuming the residential assessment stays constant. As properties appreciate noticeably taxes also go up in lockstep. If you owned a property in a resort community, taxes will increase by almost 60% over a 4 year period in line with appreciation.
| Gallagher is repealed | % change from 2019 | ||||||
| 2023 (5%/year) | 600000 | 7.15% | $ 42,900 | 0.0812 | $ 3,482 | 20% | |
| 2023 assume (10%/year) | 700000 | 7.15% | $ 50,050 | 0.0812 | $ 4,062 | 40% | |
| 2023 assume (15%/year) | 800000 | 7.15% | $ 57,200 | 0.0812 | $ 4,642 | 60% | |
Want to play with the numbers; here is a spreadsheet of the calculation
Summary
The opening sentence of the Ballot initiative is “Without increasing property tax rates”. This statement is technically correct, but very misleading. If another variable is changing, like property values, with a constant “tax rate” your taxes will continue to increase by 15% in 2023 even with Gallagher in place. Without Gallagher the average tax bill will increase by almost 40% this is while inflation is basically zero in the United States and we are technically in a recession. Regardless of which way you vote or your political affiliation, know that your taxes are going up, just how much is up to you.
Additional Reading/Resources
- https://coloradosun.com/2020/05/12/coronavirus-gallagher-amendment-property-taxes-colorado/
- https://www.denvergov.org/content/denvergov/en/denver-department-of-finance/our-divisions/assessor.html
- https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/HPI_2019Q2.pdf
- http://leg.colorado.gov/sites/default/files/property_tax_05-12-20.pdf
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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