COUNTY OF ALBEMARLE
Deferral Program for Real Estate Taxes
Board consideration of a program to defer a portion of real estate tax increases
Tucker, White, Wiggans, Davis
LEGAL REVIEW: YES
June 1, 2005
ACTION: INFORMATION: X
Virginia Code Section 58.1- 3219, enacted by the General Assembly in 1990, enables localities to adopt an ordinance to create a real estate tax deferral program for a taxpayer. It allows the deferral of taxes that exceed 105% of the real estate tax on the property owned by the taxpayer in the previous tax year. Such a program is subject to limitations and requirements set forth in the enabling legislation. The Board asked staff to research this program and provide information regarding it. To date, no locality has adopted this type of tax deferral program.
Goal 4.2: Fund County Services in a fair, efficient manner and provide needed public facilities and infrastructure
A deferral program may defer a portion of the real estate tax if the amount of tax on a property exceeds 105 percent of the tax in the previous year. A program may apply to all property or only property owned and occupied as the sole dwelling of the taxpayer. The enabling authority does not authorize the deferral program to be based on the value of the property or the wealth of the taxpayer. The program can require a higher minimum percentage than 105 percent to qualify for a deferral. Property in the real estate tax relief program for the elderly or disabled or in land use is not eligible for a deferral program. Taxpayers who are delinquent in the payment of taxes on property for which a deferral is sought are not eligible for a deferral.
A deferral program must allow taxpayers, at their option, to defer all or any portion of the real estate tax that exceeds 105 percent (or such greater amount as determined in the ordinance) of the real estate tax on such property owned by the taxpayer in the previous tax year. The accumulated amount of taxes deferred and interest must be paid to the locality by the owner upon the sale or transfer of the property, or from the estate of the decedent within one year after the death of the owner. The interest on the deferred tax is computed at the rate established pursuant to § 6621 of the Internal Revenue Code or (effective July 1, 2005) at any lesser rate determined by the locality. The discretion to grant a lower interest rate is the result of the 2005 General Assembly’s adoption of Senate Bill 1087. The IRS interest rate is determined quarterly based on the federal short-term interest rate plus three percentage points. For the quarter beginning April 2005, the interest rate is 6%. However, the interest rate over the last fifteen years has been as high as 11% and as low as 4%. As recently as calendar year 2000 the rate was 9%. This is a daily compound interest rate. Because interest rates can change quarterly and the deferral can be subject to significant interest charges, it would be difficult for a taxpayer to calculate the effective “savings” of participating in the deferral program. Under the new legislation that allows a locality to set a lower interest rate, the interest rate difficulties for the taxpayer may be able to be addressed. However, even a locally-set interest rate would need to be adjusted periodically to fairly reflect market interest rates, adding another layer of administrative complexity.
Staff has attempted to analyze who could utilize this program. Because the deferred tax constitutes a lien upon the real estate and a requirement of most mortgages is that taxes must be paid from an escrow account and be paid in full, properties subject to mortgages may not be able to participate in a deferral program. This may significantly limit the
applicability of the program to a wide segment of taxpayers.
Although this program has been enabled since 1990, no localities have established a deferral program. Although the Weldon Cooper Center’s 2004 survey of local tax rates reported that Chesapeake, Virginia Beach, and Waynesboro are offering a deferral program and that Loudoun County previously had a deferral program, staff contacts in each of these four jurisdictions indicated that this information was incorrect and that none of them have or had adopted such a program. The Weldon Cooper Center’s 2004 survey of local tax rates further reported:
“The cities of Alexandria, Falls Church, and Fairfax and the counties of Fairfax and Henrico have considered deferral but have not adopted it. Administrative problems appear to be the major reason deferral has not been adopted. According to Henrico staff, ‘The administrative procedures for tracing the properties and recovering the relevant taxes upon either the death of the owner or transfer of the property itself would be both cumbersome and time consuming and could not be accomplished with existing staffing levels or existing computer systems.’”
Although the cost of administering a program in Albemarle County has not been fully analyzed, it is believed that the program would be difficult to implement in a fair and cost effective manner. It could make revenue projections more difficult and, if widely utilized, require tax rate increases to generate the same amount of revenue that would be collected without a deferral program.
Although staff appreciates the appeal of a general real estate tax deferral program, compounded interest rate costs to the taxpayer, conflicts with mortgage requirements, the administrative burden, and costs to the County appear to outweigh the benefits of a tax deferral program. Staff does not recommend its adoption locally at this time.
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