Court Ruling May Result in Property Tax on Previously Exempt Community Association Property

A recent Nevada Supreme Court decision suggests that community association common areas may be subject to property tax based upon the value of common area improvements, even if the underlying land is effectively valueless because it is encumbered by restrictions of the community association. While this case is based on interpretation of Nevada law, it could have broader implications as states across the country seek new revenue sources to shore up their finances.

The Supreme Court held that the State Board of Equalization (the State Board) incorrectly reduced the tax valuation of common area property to an arbitrary nominal value. The taxable value of the land was $0, but the assessor valued the improvements, including clubhouses, recreation centers, and parking lots, at $19.5 million. The State Board reduced this to a nominal value of $500 per common area parcel because it determined that the restrictions encumbering the common area significantly decreased or negated any market value of the common area improvements, since the land and improvements could not be sold on the open market. Therefore, the State Board concluded that the assessor’s valuation exceeded the full cash value, and that would violate Nevada law.

The Supreme Court found that the State Board failed to give due consideration to the Nevada tax code’s valuation methods, holding that improvements on land could have substantial value even if such improvements or the land do not have value on the open market. The Supreme Court held that the State Board could not simply ignore the valuation methods set forth in the tax code and assign a nominal value to improvements purely based on the presence of restrictions on the land.

States that are still strapped for cash may take a closer look at what have otherwise been long-standing procedures of assessing zero or nominal value to community association, HOA, or condominium common areas. It is interesting to note that not only are these common areas and improvements generally encumbered by covenants that restrict their transfer, but it has been generally assumed that the value of such common areas and improvements has already been captured in the value of the residential homes within the project. Homes within communities that include clubhouses, recreation centers, and other amenities typically are assessed higher than similar homes in communities without such common areas and improvements. This taxation of these common areas and improvements may amount to double taxation.

Topics:  Common Areas, Community Associations, Condominiums, Property Improvements, Property Tax, Property Valuation, Tax Revenues

Published In: Residential Real Estate Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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