By: Marian Kornilowicz and Mark Leavy

Real Estate Tax.jpgIf you are a resident of Philadelphia, then you likely know about the ongoing turmoil surrounding Mayor Nutter’s pursuit of real estate tax reform. His plan is known as the Actual Value Initiative, or AVI, and will have the effect of increasing the real estate property taxes paid by homeowners in certain neighborhoods and lowering them in others.

Due to widespread concerns that there might be a dramatic increase in the taxes paid by homeowners, implementation of the AVI was postponed until the 2014 tax year. On October 18, 2012, the state Senate passed a bill necessary for the AVI to go into effect, and Governor Corbett is expected to sign the bill.

There is a critically important deadline coming up – November 15, 2012 – that no Philadelphia homeowner should miss. Even though it is more than a year before the new tax assessment and rates will go into effect in 2014, homeowners must submit a Homestead Exemption application by November 15, 2012 (if they have not already done so). As long as your Philadelphia residence is your primary residence, you can obtain a $30,000 reduction in the assessed value of your property for real estate tax purposes.

There is no reason not to take advantage of the potential tax savings – even though the actual dollar value of the “savings” you may realize is unknown. And, of course, calling it a “tax savings” may not really be accurate since the Homestead Exemption will probably only result in less of an increase in your taxes as a result of the AVI. This is shown in the following explanation and example.

The existing real estate tax law applies a tax rate to the “assessed value” of a property. The “assessed value” is currently set by the City at 32% of the “market value.” In 2012, the tax rate was 9.432%. So, for $100,000 of “market value,” 2012 real estate taxes were in the amount of $3,018.24 (9.432% x 32% x $100,000). In 2013, the tax rate is being increased to 9.771%. This results in taxes of $3,126.72 per $100,000. (9.771% x 32% x $100,000), or an increase of $108.48 per $100,000.

One of the big issues with the existing tax law was that the “market values” actually used are grossly inconsistent with reality. Typically, higher valued residential properties were grossly under-assessed and lower valued residential properties were over-assessed for tax purposes. This led to highly skewed real estate taxes for homeowners across the City. (Interestingly, commercial real estate was generally more accurately assessed.)

The AVI is intended to make the tax system more fair by using market values that reflect the current “actual value” of real estate. This is of great concern to homeowners because – instead of basing real estate taxes on 32% of the “market value” – taxes will now be based on 100% of the market value! For example and at the 2013 tax rate, real estate taxes on $100,000 of property value would be $9,771.00 – a more than $6,600 increase.

It is easy to see in this example how big of a difference the $30,000 Homestead Exemption could make. Using the same example of $100,000 of property value, the Homestead Exemption would apply real estate taxes based on $70,000 – which, at the 2013 tax rate, would produce taxes of $6,839.70. In this example, the Homestead Exemption would reduce taxes by in taxes of almost $3,000.

Now, real estate taxes will not become three times what they were “overnight” as shown in this example. It is expected that the AVI program will be implemented with a new, “lower” tax rate. The big question on everyone’s mind is what the new rate is going to be – and it remains unknown for every homeowner at what value their home will be assessed, and what their resulting real estate taxes will be.

So, no one knows for sure how much their 2014 taxes will be. About the only thing you can be sure about is that a $30,000 reduction in market value under the Homestead Exemption will blunt the impact of the tax increase coming in 2014.

This is the web link to apply for the Homestead Exemption online.

Marian A. Kornilowicz is the Chair of the Business Practice Group of Cohen Seglias Pallas Greenhall & Furman PC. His practice is concentrated in the representation of clients in varied business transactions and real estate matters.

Mark J. Leavy is an Associate with the Firm and specializes in employment litigation at the trial and appellate levels.