Property Taxes and Annexations

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Chris McLaughlin

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It’s been 10 years since the General Assembly limited the authority of municipalities to annex property into their municipal limits.  My colleague Frayda Bluestein explained the details of these changes here and here. The most consequential of those changes was preventing municipalities from pursuing annexations that were not requested by the property owners (aka involuntary annexations) unless a majority of voters in the affected areas approve the annexations.

The graphics below (courtesy of this excellent mapping tool) illustrate the impact of these changes on annexations made by the city of Raleigh.  The first map shows in light blue all annexations made by the city in the first decade of the 2000s.  The second map shows in dark blue the far fewer annexations made by Raleigh in the second decade of the 2000s.  The new annexation laws took effect in 2011 and are almost certainly the reason for the dramatic drop in Raleigh’s annexations.

 

 

 

 

 

 

 

 

 

 

 

Although annexations are far less common they still occur with some regularity. That means property tax collectors still need to know how to process and bill annexations.  I discussed the property tax implications of the 2011 changes in this blog post.  Today I provide a more complete explanation of how property taxes must be levied after an annexation.

First, a few basics about annexation.  An annexation is simply the addition of property to a municipality’s physical boundaries and legal jurisdiction.  The property being annexed must reside in “unincorporated” territory that is not already part of another municipality. In other words, annexations may only occur for properties that are free agents with respect to municipal residency.  Counties can’t annex property because all property in the state is already part of a county; there are no properties that are free agents when it comes to county residency.

Even after the 2011 changes, annexations can be either voluntary (requested by the property owner) or involuntary (initiated by the municipality and completed without the property owner’s consent).  But as discussed above property owners now have the power to prevent involuntary annexations.

After an annexation, the property falls under the tax jurisdiction of the municipality.  Here’s how those taxes are calculated:

Annexation = Proration

We normally do not prorate property taxes (more details in this post), which means we normally do not send partial-year tax bills.  That said, we do prorate the first year of municipal property taxes on annexed property based on the number of full months remaining in the fiscal year after the date of annexation.  G.S. 160A-58.10

Example: 

123 Coach K Drive is annexed by Blue Devil City as of August 1, 2021.  Although the property was not sited in Blue Devil City as of January 1, 2021 (the listing date), the city is permitted to tax that property for the 2021-2022 fiscal/tax year. 

Based on the August 1 annexation date, there are 10 full months (September 2021 to June 2022) remaining in the 2021 tax year.  Blue Devil City should levy 10/12 of its “regular” 2021 tax bill on 123 Coach K Drive. For example, if the full tax bill would have been $1,200, the city would bill 10/12 of that amount, or $1,000 for the 2021 tax year. 

Taxes for 2022 and future years would be billed with no proration.

Involuntary annexations, to the extent they still occur, must take effect on June 30.  G.S. 160A-58.55(h)(5).   From the tax collector’s perspective, that is great news because then there are no full months remaining in the tax year after the date of annexation. Hence, no need to prorate any taxes. The annexed property would be billed the full amount of taxes for tax year that begins on July 1.

In contrast, voluntary annexations may take effect on any date.  Some voluntary annexations become effective July 1, to coincide with the start of the fiscal year.  Although a bit counterintuitive, these annexations still require proration because there will be only 11 full months (August to June) remaining in the tax year following the effective date.

Remember that these prorated tax bills apply to both real property (land and buildings) and taxable personal property that had situs on the annexed property as of the previous January 1.  For instance, if I keep my boat at my house, and my house is annexed by the town, the town then has the authority to tax not only my house but also my boat.

September 1 is the Date to Remember

Once we know the amount of the first municipal tax bill for the annexed property, we need to determine when that bill will be due and delinquent.  The annexation provisions state that if the annexation becomes effective on or before September 1, then the prorated bill will be due as usual along with all “regular” taxes for that tax year.  But if the annexation becomes effective after September 1, then the prorated bill will be considered part of the following year’s tax levy and will be due and delinquent along with “regular” taxes for the following year. G.S. 160A-58.10

Examples:

For the annexation of 123 Coach K drive on August 1, 2021, the Blue Devil City 2021 tax bill (prorated to 10/12 of the full bill) will due and delinquent along with all regular 2021 city taxes: due on September 1, 2021, delinquent on January 6, 2022. 

Assume also that Blue Devil City annexes 456 Coach Scheyer Lane on October 1, 2021.  The 2021 tax bill on that property will be prorated to 9/12 of the full bill based on the 9 full months remaining in the 2021 tax year after annexation (November to June).  Because the annexation occurred after September 1, 2021, the prorated bill will be considered part of the city’s 2022 tax levy and will be due on September 1, 2022 and delinquent on January 6, 2023.

Although prorated tax bills for post-September 1 annexations are not due until the following year, the annexing municipality still may wish to send the property owner a bill in the year of annexation (with the appropriate due and delinquency dates highlighted, of course).  Otherwise, the owner may be in for a rude surprise the next year when they receive a very large municipal tax bill (representing the prorated first year bill plus the full second year bill).

Farmland and PUV Property

As described in this post, the 2011 changes prohibits the annexation of property being used for “bona fide farm purposes” without the written consent of the owners.  This is true even if the property is not receiving the present use value (PUV) exclusion. Previously, this limitation on annexation applied only to PUV property.

Deannexxations?

Can a municipality lose property through a deannexation? Yes, but as Frayda Bluestein describes here it may occur only as the result of legislation passed by the General Assembly.  Municipalities cannot on their own accord remove property from their jurisdiction, nor may property owners force a municipality to do so without intervention from the General Assembly.

Our General Statutes do not describe what should happen with respect to property taxes when a deannexation occurs.  As a result, the municipality needs to read the text of the deannexation bill to determine how to address municipal taxes. Often those bills make no mention of property taxes and simply state that the property is removed from the municipality’s jurisdiction as of June 30, the end of the fiscal year.

If the bill says nothing more, then technically the municipality would have the authority to tax the deannexed property for new fiscal year that begins on July 1 because the property was sited in the municipality as of the listing date (the previous January 1).  While that may be technically true, I think the spirit of such a deannexation bill would be to eliminate all municipal authority, including taxing authority, over the deannexed property beginning with the new fiscal year that starts on July 1.  To avoid incurring the wrath of the General Assembly, the best approach for a municipality subject to a deannexation that takes effect on June 30 is to decline to tax that property for the new fiscal year that begins on July 1.

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