Although HH, the Colorado tax reduction initiative was ultimately defeated, there was one profound item in the legislation that will have far reaching impacts. One of the biggest changes in the proposal is that second homeowners (non-primary residents) are now paying more for property taxes. What is in the proposal and why is this so important for Colorado property tax owners.
Proposition HH created new subclasses of residential properties
Although it has been proposed in numerous bills, proposition HH is the first time that a distinction is now being made between residents and nonresidents for tax purposes. In other states, it is common to have homestead exemptions, but in Colorado all residential properties pay the same rate.
Proposition HH radically alters the property tax structure in Colorado:
“The act temporarily reduces the valuation for assessment (valuation) for certain subclasses of nonresidential and residential property for the property tax years 2023 through 2032 and creates the new subclass of renewable energy agricultural land, which is a subclass of nonresidential property. The act also establishes the residential real property subclasses of primary residence real property and qualified-senior primary residence real property and establishes administrative procedures related to the classification that are based on the procedures for the homestead exemption.”
How do homestead exemptions work in other states?
For example, in Georgia a homestead exemption gives primary residents between 25-50k off their assessed valuation, so assuming a 200k house, the savings would be about a twenty five percent reduction in property taxes. This would be “offset” with non-primary residents paying 25% more than a permanent resident. Essentially a property tax reduction is only given to full time primary residents.
Is taxing second homeowners more the best strategy
When you think of Colorado’s ski towns, I’m going to differentiate between second homeowners that solely use their properties for personal use as opposed to nightly rentals. Assume there is a second homeowner who has a 4m dollar home in Steamboat. That owner currently pays the same amount as a primary resident yet uses very few services. For example, they don’t use the schools for their kids, yet still pay taxes for them. They only drive on the roads maybe 90 days a year yet pay the same as a resident who uses them daily. So, I’m not sure from a “fairness” standpoint second homeowners should pay more.
On the flip side the argument is that someone who has a 4 million second home can afford to pay more taxes. Regardless of which camp you are in, segregating property types based on occupancy creates some thorny questions of fairness, etc…
What about long-term rentals?
Long term rentals are also being discussed as a new subclass of residential properties and a commercial property tax classification. While on the topic of classes of residential real estate, it should be critical to encourage long term rentals in the various communities throughout Colorado, yet under the current classification they would pay more in taxes than a primary resident and the same taxes as a second homeowner. This issue needs to be addressed.
Summary
Although HH did not pass, the desire to segregate different property ownership is here to stay. There is a huge push for revenue in this legislature as unlike the federal government CO doesn’t allow deficit spending. As the state continues with new programs like universal kindergarten and pre-kindergarten and various other initiatives, they must be funded either by the state or counties. One funding mechanism that is on the table from HH is to increase taxes on nonresident second home owners.
This is just the beginning of the trend as Governor Polis has already talked about a new subclass of properties for nightly rentals that would pay commercial property tax rates. Creating different subclasses brings to the surface questions of what is fair from a taxation perspective and also what the best strategy is to encourage certain behaviors like long term rentals.
Unfortunately I have yet to see anyone looking at the subclasses of real estate holistically to determine what will be the best long term solution for Colorado. For example, how HH was proposed would have long term rentals properties paying more than primary residents and the same as nightly rentals and second homeowners.
We are going down a slippery slope without any direction. Before getting too far down the line, the Colorado legislature has substantial work to do to answer the questions of fairness and encouragement/discouragement of different behaviors via taxation.
Additional Reading/Resources
- https://leg.colorado.gov/explorebudget/
- https://leg.colorado.gov/bills/sb23-303
- https://www.decaturga.com/adminservices/page/homestead-exemption-information
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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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