Property Tax Assessment Issues

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The foundation for genuine property tax relief is the amendment to the Indiana Constitution that limits homeowner property taxes to 1% of gross assessed value.

The 1% homeowner property tax cap will enable Hoosier working families to reasonably predict their property taxes so they do not become an unaffordable burden that could lead to the loss of the family home. The 1% cap ends the legacy of failure where (1) homeowners suffer permanent tax increases for temporary property tax relief and (2) property tax caps disappear.

Reasonable property tax predictability is important to Hoosier working families. Recent General Assembly actions have played havoc with the ability of some homeowners to reasonably predict their property tax burden. Legislation passed by the General Assembly the past six years that (1) limited property tax relief, (2) eliminated inventory taxes, and (3) led to the improper assessment of business property caused homeowner property taxes in some urban areas to leap up 100%, 200%, even 300%.

There are those who question the importance of the 1% homeowner property tax cap because the cap is based on the gross assessed value of the homestead property, which is allowed to fluctuate. In spite of currently declining home values, homeowner property tax assessments will likely CREEP UP over time. However, these assessment increases BY THEMSELVES are NOT expected to cause homeowner property taxes to LEAP UP. In other words, the 1% homeowner property tax cap in the constitutional amendment is the foundation for genuine property tax relief even if homeowner property tax assessments increase because of market value increases.

It is easy to understand the skepticism of those who think the General Assembly will erode the property tax relief delivered by the 1% homeowner property tax cap by allowing homeowner assessments to increase significantly in relation to business assessments. A review of recent property tax history both explains this skepticism and shows that the skepticism is misplaced.

For many years, Indiana homeowners benefited from the underassessment of residential property compared to business property; therefore, businesses shouldered the majority of the tax burden and allowed homeowners to benefit from reduced property tax liability. However, in 1998, the Indiana Supreme Court ruled the state had to change the implementation of property tax assessment. The State Board of Tax Commissioners determined that the best way to implement the Supreme Court's decision was to adopt a market value-in-use system of assessment. A market value-in-use system differs from the more widely accepted market value assessment, in that all property is to be assessed, not at its "highest and best" use, but at its "current" use. The market value-in-use system allows farmers to pay property tax on their land, based on its use as farm land, rather than its potential use as residential, commercial or industrial development.

The 2002 reassessment was based on 1999 market values and the first time the market value-in-use system of assessment was used. Many homeowners experienced dramatic property tax increases, especially those with well-maintained older homes that had lower assessments for many years. The prior system failed to take into account remodeling and rehabilitation of older properties.

Additionally, 2006 was the first year of a process known as "trending." Trending is a refinement of the property tax assessment system adopted by the General Assembly that requires assessors to update assessments annually based on the appreciation or depreciation of property values. Trending for 2006 reflects changes in value for the years 1999 through 2005. By all accounts, this six year period resulted in substantial appreciation of residential property.

Some homeowners do not fully understand that assessments lag current market values by a couple of years. For the Pay 2010 property tax year, assessments are established on March 1, 2009. The March 1, 2009, assessments are determined by using market values from sales made in 2007 and 2008. Only sales in 2008 are used if there are sufficient neighborhood sales. Indiana home values generally started to decline the fourth quarter of 2008. These declining home values will start to show up as reduced assessments no later than 2011. A taxpayer who questions the accuracy of an assessment can now obtain a preliminary informal meeting with the assessor to review the assessment without being required to present documentary evidence.

If homeowner property taxes have increased, have business property taxes also increased? Yes, in most cases. However, some business property tax assessments were incorrect. Under regulations adopted by the Department of Local Government Finance (DLGF), assessors are to use sales data to implement trending. Assessors usually have sufficient sale data to trend the assessment of residential property. Business property usually does not transfer as often as residential property, making adequate sale data more difficult to obtain. In addition, in many urban areas in the state, the market value of industrial properties has probably depreciated, rather than appreciated, in the time period between 1999 and 2005, because of factory closings and layoffs. However, the DLGF ordered reassessment in several counties that resulted in assessment increases of commercial and industrial property because of improper trending.

To conclude this review of recent property tax history, the 2002 and 2006 reassessments covered several years each and resulted in significant homeowner assessment increases because of the market value and trending changes. Recent declines in home values are just now starting to show up as reduced assessments because assessments lag current market values by two years. An important development has been the increase in business property assessments in some urban areas. Going forward, homeowner assessments will fluctuate much less because of the market value trending that will take place EACH YEAR. It is inaccurate to assume future homeowner reassessments will continue to increase at the rate of recent past reassessments.

There are five keys to genuine homeowner property tax relief: (1) control local government spending, (2) pass the Constitutional Amendment on November 2, 2010, (3) continue without change the annual market value-in-use trending of assessments, (4) support DLGF-directed efforts to consistently assess property throughout the state, (5) keep business property assessments from declining to artificially low levels.

The 1% homeowner property tax cap in the Constitutional Amendment is not by itself the property tax "solution." Watchdog Indiana will continue to push for property tax reform where the property tax paid by individual income tax payers is eliminated and replaced by variable local income taxes. However, the Constitutional Amendment is a necessary first step along the way to meaningful reform.

NOTE: The Indiana Code currently states that a "Homestead" consists of a dwelling and not more than one acre of real estate immediately surrounding that dwelling. The definition of "Dwelling" is limited to a house and garage, and includes a deck, patio, gazebo, and residential yard structure (other than a swimming pool) ATTACHED to the dwelling.

What this limited homestead definition means is that in addition to a swimming pool, a County Assessor cannot legally recognize a detached backyard storage building, gazebo, or non-commercial woodshop as part of someone’s homestead.

The ramification of this situation is that a person's house, garage, and most of its attached improvements are included in the 1% homestead property tax cap while all other homestead improvements within an acre fall under the 3% cap.

The Indiana Code definition of "Homestead" should be changed by deleting the phrase "attached to the dwelling" and including legal language that includes all non-commercial real and personal property improvements within not more than one acre of real estate immediately surrounding an individual’s principal place of residence. Any decisions about the configuration of the homestead acre should be left to the discretion of the homeowner. These homestead definition improvements would properly identify structures such as detached storage buildings and non-commercial woodshops as part of a homestead.

This page was last updated on 03/31/13 .