How will remodeling affect your property taxes? An expert answers

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Q: We want to finish our basement. We are thinking about making it a finished walkout space with a door to the outside, and we are planning to add several windows across the back.

The original construction had rough plumbing installed and insulated walls. If we finish this level, will we pay additional real estate taxes? We want to put drywall up, carpet the floor, construct a half-bath and kitchen, and also add a fireplace or wood-burning stove.

A friend told us that if we do not finish the rafters with a ceiling that our taxes will not go up. Is this true?

-- Ann P.

A: This is a great question, and one that not everyone considers when remodeling. A project of the magnitude you’re describing—especially with an added bath and kitchen—would most likely mean shelling out more money in additional real estate taxes. The general rule of thumb is that if it adds value to your house, it will add to the bottom line of your property tax bill.

But the way property is assessed and valued can get pretty murky, so I decided to call in the experts at the International Association of Assessing Officers.

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“This sounds like a straightforward question, but really is not,” says Alan Dornfest, the property tax policy supervisor of the Idaho State Tax Commission and spokesman for the IAAO.

“The simple answer would be that, if the finishing of the basement increases the market value of the property, assuming current market value is the basis for the tax assessment, then the assessed value would go up and one could approximate the effect on taxes by multiplying by the appropriate levy rate in the jurisdiction,” he says.

But your local municipality and state play a big role here, and the assessment systems differ widely from place to place. So even the so-called simple answer isn’t simple.

Your best bet is to contact your local assessor, who could help you understand your local laws and practices. The local assessor’s office could tell you how taxes are assessed in your area along with the levy rate, but also shine a light on what other kinds of considerations you need to take into account. Bear in mind that renovations at this level will likely require you to pull permits, and in many municipalities, the permit information—including the cost of the renovation—will be provided to the assessor’s office.

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For example, some states, such as North Carolina, have cyclic reassessment, where the improvement might not show up in an adjustment for several years. Others, such as Oregon, use base years, so the assessment might be based on how much value the improvement added to some base year, which could be 10 or 20 years ago.

As you can see, there’s a lot of details here that would greatly impact how your property will be assessed with the finished basement. Your local laws may even spell out the rumored caveat about leaving the rafters unfinished.

Regardless of how your assessment system works, it’s important to remember that cost does not necessarily equal value. The assessor will see your renovations this way as well, basing the assessment on value, not cost.

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Ilyce Glink is an award-winning, nationally syndicated real estate columnist, blogger and radio talk show host, and managing editor of the Equifax Finance Blog. Follow her on Twitter @Glink.