Lower taxes: Silver lining of falling home prices

NEW YORK (CNNMoney.com) -- Your home value has sunk like a stone, and you're so far underwater you'll have to hold your breath for years. Can you at least get a break on your property taxes?

In some cases, yes. Many municipalities' tax bills are due in May, and the tab for 2009 could be lower.

As a rule, city and county assessors reappraise property values annually or biannually, using recent sales of comparable homes in the neighborhood to set values. So in areas that have seen significant drops in home prices, appraisals - and thereby property taxes - could also drop.

"Assessors have been flooded with requests from homeowners to reassess their home values," said Los Angeles County Assessor Rick Auerbach.

California is a special case, however, thanks to Proposition 13, a 30-year-old amendment to the state constitution that limited property tax increases to 2% per year. That meant that as California markets churned out double-digit price increases year after year, assessed values soon fell way behind market values.

As a result, only people who purchased homes at or near the market peaks are likely to have their homes revalued down. Those bought before 2003 likely have their assessed value still lagging market values.

For example, if you bought a home in Santa Monica in 1998 for $300,000, the home may still be worth $1 million - even after losing 25% of its value during the past two years. Meanwhile, its assessed valuation has only crept up about 25% to $375,000. No soup for you. As a matter of fact, your assessment should rise 2%.

However, recent buyers in areas such as Merced and Los Angeles, where prices have fallen more than 50% from their peak, should get tax breaks. Someone may have purchased a Merced house two years ago for $200,000, but the property is now valued at $100,000. The assessment, and the taxes, will be cut to reflect that decline.

In Los Angeles, the savings could be substantial; the average owner of those properties Auerbach is now reassessing should save an average of about $1,300 a year.

In other states, even if tax assessors reduce appraised values to reflect market conditions it still does not automatically mean a property tax cut. Localities could still raise their tax rates, the percentage of the home's value that is used along with the assessed valuation, to calculate the final bills.

"Taxes are based on property values times [the tax rate]. We could have declining values but make up for it by raising the rate," said Bill Donegan, the property appraiser for Orange County, Fla., which includes Orlando.

This year, though, the value drops are so steep that any rate rise will probably not offset the lowered assessments. Plus, governments usually can't just raise rates indiscriminately.

"In most places there's a statuary limit to rate increases," said Ken Wilkinson, the property appraiser for Lee County, Fla., where Cape Coral home values have plunged 44% from their peaks. "In Florida, they can't be raised more than 10%."

That should lead to substantial savings. In Orange County, the average taxpayer paid about 8% less last year, or nearly $130. "They may see a bigger drop this year," said Donegan.

The savings will be more modest, or non-existent, in states with lesser price declines. Many localities will raise rates enough to offset lower assessments, according to Joseph Henchman, the Director of State Projects for the Tax Foundation, a group that studies tax policy.

"The actual [revenue] collections could still rise or stay about the same," he said.

Governments may also raise fees on water, sewage and other services to keep up with looming budget deficits. They could even create entire new taxing entities, known as tax district, to fund fire departments, law enforcement, even libraries.

The local governments must keep revenues up to pay for programs they initiated during more flush times.

"We often see a ratchet effect," said Henchman. "Spending goes up when collections are strong but stay up even when collections go down."