Like many of you I was excited to finally hear my property taxes were going down as this never happens! 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 issue with the property tax cut in Colorado.
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.
Why will residential property taxes fall?
As commercial property values along with the values of minerals plummet. This would cause the residential assessment rate to fall from 7.15% to 5.88% during the next reassessment cycle. That 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.
Will taxes really fall almost 20%?
Unfortunately, there is another piece of the equation, residential property values that was conveniently left out of the equation! Let’s do a analysis to see what the real numbers are. 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 15% increase (7.5% a year is more realistic). As you can see, the property savings are considerably less than the 18% calculation as they are offset by rising house values. Furthermore, counties/cities can approve mill levies that can increase property taxes. The real tax savings might be in the 5 to 10% range for most residential property owners assuming no mill levy increases which is a big if as I just got notice of three new mill levy proposals which will be on the next ballot.
| 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 7.5%/year | 575000 | 5.88% | $ 33,810 | 0.0812 | $ 2,744 | 5.4% |
Want to play with the numbers; here is a spreadsheet of the calculation
Gallagher amendment calculation
Summary
The media loves the headline that property taxes will fall 18% and “decimate” county budgets, the real numbers tell a different story that taxes will fall less than half of the predicted 18% due to rises in property values. Furthermore, the fall in taxes is after a decade of increased taxes due to mill levies and skyrocketing residential and commercial values in every resort community and throughout the Denver front range. As you get your tax bill, hopefully it brings a smile knowing that for once taxes went down, just not as much as the media wants you to believe!
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
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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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