Although HH, the Colorado tax reduction initiative was ultimately defeated, there was one profound item…
The legislature passed a little known bill in 2021 to allow property owners to defer their property taxes above 4% increase starting in 2023. On the surface, this sounds like a great plan. Why wouldn’t someone want to defer their property taxes. Unfortunately the legislature has no clue how real estate lending actually works and deferring taxes will be a death knell for property owners. Deferring property taxes will have serious unintended consequences for anyone who goes down this path.
What is in the Colorado Property Tax Deferral legislation?
Colorado’s Property Tax Deferral Program has traditionally helped seniors and active military personnel continue to afford to live in their homes by deferring the payment of their property taxes.
On January 1st 2023, the State of Colorado is expanding the deferral program to allow those who do not qualify for the senior or military personnel program to defer a portion of their real property taxes if they exceed the property tax-growth cap of 4%, averaged from the preceding two years.
Under this program, the minimum amount a taxpayer may defer is $100 and the maximum cumulative taxes that a taxpayer may defer is $10,000.
The application must be filed between January 1st and April 1st, 2023. Taxpayers must reapply each year to continue deferring prior year taxes, as well as to request deferral on current year taxes.
If the loan for deferred taxes and accrued interest is not paid by the due date, such amounts are delinquent as of that date, and the State Treasurer may foreclose for the deferred tax lien.
Why was the property tax deferral legislation even passed?
For hundreds of years in Colorado (or whenever the first property tax was passed), we have not needed an option to “defer” taxes for any single family primary residence owners. Why now? Unfortunately, in 2023, we are going to see approximately 40% increases in taxes; remember taxes are in arrears so you will get your new assessed value in June with payment due in 2024.
The reason for the big jump is not just the huge rise in values, it is the elimination of the Gallagher amendment which capped how fast assessed values could rise by balancing commercial and residential values. When Gallagher was repealed, now property taxes can rise to infinity and beyond! There is no mechanism to slow the pace of property taxes in Colorado which has led to the “deferral legislation”.
Unfortunately deferring taxes does nothing to actually slow the huge increase in taxes that everyone will see this year and feel next year!
Is it true that deferring taxes will allow you to use your equity?
No, this is a dumb notion that was highlighted in the legislation. Deferring property taxes just creates a tax lien on the property that you have to pay in the future along with interest. You don’t actually use your equity! Creating a tax lien just kicks the can down the road and creates a bigger problem in the future.
The only way many who defer taxes will ultimately resolve the issue is to sell the property and they will get substantially less due to the tax lien. Unfortunately any investor who really knows real estate will pull a quick report to see if there is distress. As a lender we subscribe to a service which will show liens on the property (it takes 2 seconds to pull a property report and it doesn’t cost much or you can look at the county on a particular property). As soon as you see unpaid taxes this is like blood in the water for a shark and buyers will know there is distress and push the price down.
Property taxes are a super priority lien
Nothing can eliminate taxes. Even a Bankruptcy or Foreclosure is subordinate to property taxes which is why they are referred to in the lending world as a super priority lien. In essence they are always first in line ahead of a mortgage or any other obligations. For example, if I put a loan on a house and did not pay the property taxes, someone could buy the tax lien and eliminate the mortgage. This is why lenders typically escrow for taxes and also use services to monitor that taxes are actually paid. Even if the legislature makes the deferred taxes a junior lien, a lender will still call the note due to a default as any additional liens on the property are considered a default.
What happens when you defer taxes?
When taxes are deferred, the unpaid taxes become a tax lien on the property that supersedes the mortgage. Any lender that has any sense will immediately know. In our case, we use a tax service that we set up at closing that monthly sends us a report of any tax liens. If there is a tax lien, this is an immediate trigger of default. If you read any mortgage document, paying taxes and insurance are a requirement, as soon as a lien occurs the mortgage would go to default rate until the issue is resolved. Fortunately for our portfolio we escrow for taxes and insurance to eliminate this issue, but many lenders will allow borrowers to pay their own taxes and insurance.
Once again the legislature has no clue how the real world actually works. If someone can’t pay 10k in taxes now, do we really think they will be able to pay the full taxes next year and then on top of that the taxes they deferred along with interest? Furthermore as soon as taxes are deferred for anyone who has a mortgage an event of default occurs creating a much greater problem for the same people struggling with high tax bills.
There is absolutely no way this program will be successful. It will merely create a huge tax lien sale in the future that will ultimately be bought by investors and lead to even more defaults on mortgages. Unfortunately, the root cause of the issue is not addressed, huge jumps in property taxes. Property taxes in Colorado this year will increase at almost 6 times the rate of inflation. Instead of coming up with supposed band aides to help people lose their equity, the legislature should develop solutions that cap property taxes to inflation so that they do not continue rising to infinity and beyond.
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Written by Glen Weinberg, Owner 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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