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How a Remodeling Project Changes Your Property Tax Bill

Remodeling can grow your home’s value but also boost your property tax. Here's how it happens and what it can cost.
July 17, 2018
Home Ownership Costs, Mortgages
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You transformed your dingy basement into an entertainment room, guest quarters and a three-quarter bath. Yay! Dream realized. What’s more, the makeover helps boost your home’s value.

But increased value from home remodeling can increase your property tax bill. And if you’re thinking that the tax assessor won’t notice the improvements, you may be surprised.

Here’s how a remodeling project can work its way into your tax bill and what to do if you want to dispute your property tax assessment.

1. Remodeling lifts your home’s value

Home improvements, depending on the project you choose, can boost resale value. In 2017, a finished basement with entertainment area and bathroom, for example, raised a home’s sale price by nearly $50,000, on average, according to Remodeling Magazine. That’s less than the average project cost but still good news for your home’s equity.

» MORE: See how much your home is really worth

2. The tax assessor spies the change

County tax assessors, sometimes called county appraisers, track the value of every piece of real estate in a taxing district, like a city or county. They maintain databases of local property values, often using sophisticated mapping software. Depending on a county’s size and budget, it can have many ways to detect changes in your home’s value, including:

Inspections

The assessor’s field appraisers may just drive around, noticing changes. They typically stay outdoors unless the homeowner invites them in, says Greg McHenry, county appraiser in Riley County, Kansas.

If you enclose your patio or your porch, or you added on a whole room in the back and never pulled a permit for it, we would catch that during these review cycles.

Tim Boncoskey, CHIEF DEPUTY ASSESSOR, MARICOPA COUNTY, ARIZONA

The gigantic Maricopa County, Arizona (encompassing Phoenix, Tempe and Scottsdale), with $508 billion in real estate, is too big for the door-to-door approach. It uses a car and plane to photograph homes, says Tim Boncoskey, chief deputy assessor. “If you enclose your patio or your porch, or you added on a whole room in the back and never pulled a permit for it, we would catch that during these review cycles,” Boncoskey says.

» MORE: Find the best home equity lenders

Building permits

Tax assessors monitor building and demolition permit applications to find changes affecting home values.

Boncoskey’s office watches all building permit requests. Whether your permit catches the assessor’s eye depends on the project and cost. But a homeowner spending $5,000 or more on a basement remodel, for example, should count on a visit, he says.

Tattletale neighbors

Neighbors occasionally tip assessors to unpermitted construction, usually because of a grievance or due to construction noise, Boncoskey says.

Comparable sale prices

Even if your basement remodel or your neighbor’s bathroom upgrade aren’t visible from the street, the increased value eventually creeps into your tax bill. How? Assessors track sale prices when homes change hands. They use those sale prices in reassessing tax values of nearby, similar homes. Over time, as neighbors upgrade homes and sell them for more, your home’s market value — and its tax assessment — rise, too.

“We wouldn’t know exactly an individual’s improvements if they didn’t have a permit. But, in due time, the market value of the entire neighborhood changes. So, then, the value is captured to the tax roll in the ensuing taxes,” says Boncoskey.

3. Your home’s tax value is reassessed

State and local laws require regular updates of tax rolls, some annually, others less often.

In Maricopa County, for example, annual reassessments are the rule. The assessor’s staff examine the street and aerial photos on a three-dimensional mapping program, similar to Google Street View. It links to files for the property’s address with tax history, building permits and other value-related information. Some counties use change detection software to compare their new aerial photos with older ones. Boncoskey says his staff can assess a home’s tax valuation in around eight minutes. Other counties may use different tools, but the basic approach is the same.

» MORE: What are your options for financing a home improvement?

4. Your tax bill increases

The property tax you pay is based on your home’s value. If its assessed value grows, your tax bill will grow, even if the tax rate stays the same, says Martin Marshall, county administrator in Lenawee County, Michigan. For example, in his area, a $53,000 basement remodel that adds $40,000 to a home’s value could push up the tax bill by $600, with no change in the tax rate, he says.

» MORE: Estimate the cost of your home renovation project

How to dispute property taxes

If you disagree with a tax bill, you can challenge the home’s assessed valuation. You’ll need to show that the assessed value doesn’t reflect your property’s true value.

Gather comparable listings or ask a real estate agent to pull records of comparable sales for you. Then call your assessor’s office to learn the dispute process. Aim to show that homes with similar tax values are better than yours. Start by discussing your findings by phone or in person. If you’re unsatisfied, you might be able to pursue the case with an independent tax appeals board.

» MORE: How to size up your property tax assessment

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