How should the pandemic affect property tax values for 2021?  The answer depends on (1) whether the property is personal or real and (2) whether the county is conducting a real property reappraisal in 2021.  Read on for the details.

First, a quick primer on when and how local governments appraise property for property taxes.  The goal for all tax appraisals is to set the appraisal at the property’s “true value in money,” in other words, at market value.  GS 105-283.  All taxable property is appraised at the county level except for property owned by “public service” companies (airlines, railroads, power companies, etc.), which is appraised annually by the state Department of Revenue.

Personal property (cars, boats, planes, business equipment, basically everything other than land and buildings) are appraised annually by every county.  GS 105-285(b). The most common example of the annual personal property appraisal process is the “Invitation to Renew” that we receive from the Division of Motor Vehicles each year for our cars and trucks.  That invitation is really a bill for both the annual license plate renewal fee as well as for city and county property taxes on the vehicle.  The property tax portion of that bill will show both the local tax rates and the new tax value of the vehicle.  That tax value will usually be lower than the previous year’s value, because personal property usually depreciates in value over time.

Real property (land and buildings) is appraised at least every eight years.  GS 105-286.  Counties are free to appraise their real property more frequently than every eight years, and many do.  Lots of counties are on 4-year reappraisal cycles, and at least one (Durham County) is on a 3-year cycle.  In between county-wide reappraisals, the tax value of real property may be changed only in a limited number of circumstances. Most commonly those circumstances include physical changes to the property (new construction, fire damage, etc.) or a change in the legally permitted use of the property (e.g., rezoning to allow commercial use as well as residential).  Much more on this topic below.

Whenever property is reappraised, those new tax values are determined as of January 1 of the year of reappraisal. GS 105-285.  For property being reappraised in 2021, the tax value should match the true market value of the property on that January 1, 2021. This date is set six months before the tax year begins on July 1 so that local governments know their tax bases when they begin the annual budgeting process each spring.  (Special rules apply to tax appraisals for registered motor vehicles, which I’ll avoid discussing here to minimize confusion.)

Now, back to the question at hand: how should the pandemic affect property tax values?  As discussed, tax values should reflect market values.  Many residential property markets in North Carolina have done exceptionally well in 2020 despite the pandemic. The Research Triangle area, for example, saw the number of residential sales increase by more than 20% in October 2020 as compared to a year ago. And the vacation home market from the mountains to the beaches has been bonkers.  But the commercial real estate market in North Carolina faces great uncertainty.   Many restaurants have closed permanently and hotels suffered a drop of nearly 50% in occupancy rates over the summer, while demand for office space remained reasonably healthy in some areas of the state.

Assuming that property values have changed over the past year, then the assessor needs to address personal property differently from real property.

As mentioned above, all personal property is reappraised annually.  If the market value for personal property has changed, the tax value of that property should also change.  It’s possible that the market might be flooded with used restaurant equipment, for example. If so, then presumably the market value for such equipment would have dropped.  Tax values should also.

A more difficult question is how to value property owned by a business that has closed due to the pandemic.  The fact that a business has closed does not mean its personal property is worthless to other potential users.  A forklift, for example, probably has a strong secondary market.  But restaurant furnishings that were custom ordered for a particular space might be of little value to other users. Assessors would have to lower the value of that property to account for the costs a new user would incur to remove the property and repurpose it elsewhere.

With real property, there is another important question to ask: is 2021 a reappraisal year for the county? If so, then all changes in market value as of January 1, 2021 should be reflected in the new 2021 real property tax values.

If 2021 is not a reappraisal year for the county, the assessor’s ability to change tax values is dramatically more limited.  Real property tax values cannot be changed in a non-reappraisal year due to economic issues affecting the county generally.  GS 105-287.  Pandemic-driven market value fluctuations for different types of real property should not be reflected in 2021 real property tax values.  Those market changes will be captured in the county’s next reappraisal.

There is one legal justification for changes to real property tax values in a non-reappraisal year that might be triggered by the pandemic.  GS 105-287(a)(2c) states that a tax value may be changed in a non-reappraisal year to “recognize an increase or decrease in the value of the property resulting from a change in the legally permitted use of the property.” As mentioned above, this provision usually applies to zoning changes.  But could state or local public health orders that restrict how some businesses may operate also justify a change in tax value in a non-reappraisal year?

North Carolina’s COVID restrictions began in March and remain at least partially in place today.  As of late November 2020, North Carolina was in “Phase 3” of the governor’s COVID response plan.  Restrictions on business activity under Phase 3 include 30% capacity restrictions for bars, movie theaters, and amusement parks as well as 11:00 p.m. curfews on alcohol sales in bars and restaurants.

Do these public health-related restrictions constitute changes in the “legally-permitted use” of the affected properties under GS 105-287? If so, and if they depressed the market values of those properties, then the restrictions could justify lower tax values for those properties even if 2021 were not a reappraisal year for the county.

This is a difficult question to answer.  GS 105-287 does not define what type of changes to the legal use of a property may justify a tax value change in a non-reappraisal year.  Nor have the Property Tax Commission or the state courts opined on this issue.

Clearly these public health restrictions affect how these businesses operate.  But if a bar is no longer permitted to sell alcohol after 11:00 p.m. due to public health restrictions, is that a substantial enough change in the “legally-permitted use” of the property that could justify a change in tax value under GS 105-287? Or is the fact that the property can still be legally used as a bar (albeit one with an earlier last call) mean that GS 105-287 is not satisfied and the tax value may not be changed in a non-reappraisal year?

I could make a good argument for either position.  But it may not matter. Because even if we conclude that the COVID restrictions constitute a change in the legally permitted use of the property under GS 105-287, that statute also requires that the change in legally permitted use be the cause of the change in the property’s market value. I’m not sure that is the case.

Remember, these restrictions are temporary. Given that vaccines and the end of public health restrictions are (hopefully) on the horizon, owners of previously successful bars or restaurants seem unlikely to accept materially less to sell their businesses today than they would have back in February.

And even if there is evidence of suppressed market prices for bars, restaurants, and other businesses affected by public health restrictions, it would be almost impossible to know how much of that drop were due to the restrictions and how much were related to generally sluggish economic conditions.  GS 105-287 doesn’t permit changes in tax values due to economic concerns in non-reappraisal years.

The bottom line:

2021 tax values for real property in counties conducting reappraisals in 2021 and all personal property should be changed to reflect the impact of COVID-19 and other factors on their market value as of January 1, 2021.

2021 tax values for real property in counties that are not conducting reappraisals in 2021 should not be changed to reflect changes in market value due to general economic factors caused by the pandemic.  GS 105-287 limits real property tax value changes in non-reappraisal years to very limited circumstances such as clerical or mathematical errors, appraisal errors made in the last year of reappraisal, physical changes to the property, and changes to the legally permitted use of the property.

It is possible that public health restrictions on the hours, capacity and other operational details of certain commercial activities could constitute changes in the legally permitted uses of certain commercial properties. If so, then under 105-287(a)(2c) the 2021 tax values of these properties could be lowered to reflect the limitation on legally permitted uses. But this may occur only if there is evidence that the properties suffered changes in market value due to those temporary restrictions and not due to general economic conditions.  This is high bar to clear, meaning in most cases real property tax values should remain unchanged for 2021 in counties not conducting reappraisals.