Tax Lightning
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What is Tax Lightning?

Tax lightning is the unintended consequences of the state law - the 3 Percent Cap. The state law prevents the assessed value on residential properties* from increasing more than 3 percent each year. This is even when the actual market value of your home is higher. The intent is to protect long-term home owners, especially those on fixed incomes, from experiencing large tax increases. (Our County Assessor wrote a column about this on March 30, 2023.) Exceptions to the three percent cap for residential properties are: 1) Property improvements/additions, and  2) Home purchases.

If you fall into one of the two exceptions, you may see a substantial increase of 50, 60, 70 percent or more in the estimated taxable value. This is what is referred to as "tax lightning."

*Vacant land and commercial properties are not protected by the three percent cap law.

Exception 1: Property improvements and additions

You may see valuation assessments of greater than 3 percent if you constructed an addition to your home or made major improvements. While the main part of the house will still be assessed using the three percent cap, the additions or improvements will be assessed at market value.

Exception 2: Home Purchases

This exception hits home purchasers the hardest. After you buy a home, the assessment is set to the market value as of January 1 of the following year. The difference between the previous year's assessed value and the market rate may be substantial. At times, this may increase the assessed value by more than 50 percent.

When you bought your house, the realtor provided you the assessor’s estimate of the taxes on the home before the sale. Remember that because of the 3 percent cap, this estimate was based on the previous year's assessed value and may not have been the actual market value. In a rising market, the estimate will likely be well below the actual market at the end of the year. Hence the term, “tax lightning.”

Let’s put some numbers to this.

Starting in 2007, the market value of Los Alamos homes fell. Although assessment increases are capped by the statute, assessment decreases have no limit. In late 2015, the housing market turned upward, and sales prices have increased every year at current double-digit rates. As a result, approximately 90% of residential assessments in Los Alamos are capped. Those homeowners do not see a dramatic increase in their property assessment. Tax lightning only affects the purchaser of residential property.

The graph below illustrates the impact of tax lightning. Looking at median residential sale prices and median residential assessment values on January 1 of each year from 2008 through 2022, the graph shows the disparity between the two values. The widening gap is the effect of the cap. From 2008 through 2022, the disparity between median sales price versus median assessment value ranged from 6.8% to 34%.

Example of Tax Lightning in dollars.

What does this mean in real dollars to the taxpayer who purchased a home? Let’s say for example, you purchased a home in 2022 at the median sales price of $486,500. Your estimated tax bill at closing would have been based on the list price of the home, presumably close to the purchase price. The estimated taxes would have been approximately $3,892, compared with the previous owner’s current taxes which could have been set say in 2015 when the median value was $240,000: with the 3% cap he probably paid around $2,292 in 2022. This is the “tax lightning” effect – which could be quite a shock if you paid no attention to the estimated tax document you got in the paper flurry at closing.

In addition, in a fast-rising market like 2022 the market value could have increased even more during the year.

What if I think you made a mistake?

If you believe that we made a mistake give us a call at 505.662.8030 or you can file a protest. (Please note that protests must be filed within 30 days of the mailing of the Notice of Value.) 

Graph of the median sales vs. median assessment as of January 1st