By Jones Osborn II

Anyone owning real property in Arizona should have a basic understanding of the state's real property tax system. The reason is obvious--if you don't know the rules, you may end up paying substantially more in taxes than you have to.

Here's how it works:

Valuation. Every parcel of real property is valued for purposes of the property tax. Values are established by the County Assessor each year, and are based in large part on the price at which similar properties are selling. Sales price information is generated from the affidavit of real property value that must be filed whenever a deed is recorded. This means that when you purchase property, the Assessor will know what you paid and may consider that information in valuing your property, as well as the sales price of other similar properties that have recently been sold.

Although the Assessor should assess all properties at their true fair market value, he often falls behind when property values are increasing. If this occurs, everyone with similar property is entitled to the same treatment--that is, he can't value one piece of property at full fair market value if other similar properties are generally valued at a lesser amount. This gives the property owner two ways to challenge his own valuation--(a) he can argue that the fair market value of his property is overstated, or (b) he can argue that his property is valued higher than other similar properties even if his own valuation is below its fair market value.

Each year the Assessor sends the property owner a postcard setting forth two values for his property--(1) the full cash value and (2) the limited value. The postcard also indicates the deadline for appealing the value. Appeals can be pursued by the property owner himself, his attorney, or a property tax appeal service; however, professional help of some sort is usually worth the price. Appeals frequently result in reduced valuations, so don't be hesitant to consider an appeal if you believe that your property is overvalued.

The full cash value is the full value of the property as determined by the appraiser. This is supposed to be the actual value of the property. The limited value is the value at which your property will actually be taxed. The limited value can never exceed the full cash value, but they can be the same and often are.

The purpose of the limited value is to keep the taxable value of the property from increasing too fast. Whenever the value of your property increases, the limited value will limit the increase in any given year to the greater of (a) 10% over the previous year's taxable value, or (b) 25% of the difference between the previous year's limited value and the current year's full cash value. The result is to slow down the rise in property taxes for property owners who have property that is increasing in value so that they will have time to adjust to the higher level of taxation.

There are a number of things that can cause the protection furnished by the limited value to disappear--that is, to cause the property to be taxed at its full cash value, regardless of the limited value. They are:

Therefore, if you own property which has a limited cash value substantially below its full cash value, be careful of unnecessarily taking any of the above actions, because they could result in a dramatic increase in your property taxes. For example, selling off a small piece of a much larger tract could cause the whole tract to be stepped up to its full cash value for tax purposes. Many people have been inadvertently caught in this trap over the years because they weren't aware of the tax consequences of their actions.

Assessment. There is another interesting feature to Arizona's tax system--the assessment ratio. Each type of property has its own assessment ratio, which is expressed as a percentage. The more common classifications are:

This means that residential property is taxed at only 10% of its full cash or limited value (whichever is lower), agricultural is taxed at only 16%, and so on, depending on the use of the property. As a result, a million dollar residential property will be taxed as though it's worth only $100,000.00 (or $10,000.00, if it qualifies as historic property). To determine the dollar amount of the tax on any given parcel of property, you would multiply the tax rate by the valuation (the lower of full cash or limited) by the assessment ratio.

Clearly, if you believe you have a historic property it will pay to look into qualifying your property for the historic building category, since this could reduce your taxes by up to 90%.

There are also certain classes of property that are exempt from the property tax, consisting mainly of charitable, religious, and governmental properties.

The tax rate itself is set by various governing bodies and is comprised of a number of levies for state, county, school district, bonds, and so on, and changes each year.

Payment. Property taxes are assessed annually and are payable in two installments. The installment for the first half of the calendar year is due October 1 and is delinquent November 1, and the installment for the second half is due March 1 of the following calendar year and is delinquent May 1. There is no reason to pay the taxes prior to delinquency.

If the taxes are not paid on or before the date they become delinquent, a tax certificate is sold at public auction. The certificate bears interest at the rate established by auction, but no more than 16% per annum. This means that past due taxes bear interest at a rate established when the certificate is sold, and which may vary from property to property and year to year. After the taxes have been delinquent three years, the purchaser of the certificate can commence an action to foreclose on the property.

Conclusion. It is the property owner's responsibility to see that his taxes are paid. If you haven't received a tax bill within the last year, contact the Assessor's office to make sure they have your correct address and that your taxes are current. When you get your notice of valuation (the postcard), review it carefully and file a timely appeal if your valuation appears to be too high. Before you split, subdivide, change the use or engage in new construction or demolition of your property, carefully review your property tax situation to determine whether the contemplated action will cause an increase in your taxes so that you don't get hit with an unfortunate and expensive surprise.