The Little-People Tax
Swiss Avenue mansions have been hot properties for years, but the Dallas Central Appraisal District hasn't caught on. This one is currently on the rolls for $287,800. The fixer-upper next door sold last year for $620,000. Below: East Dallas homeowner Wanda Taylor, pictured with her husband, Robert, and dogs, is an easy mark for Dallas tax appraisers. They've raised the taxable value of her house each of the last four years.
Like a lot of other homeowners in Dallas, Wanda Taylor wasn't exactly thrilled to see her annual property tax appraisal when it came in the mail this April.
In each of the past four years, the Dallas Central Appraisal District has raised the value of her stone cottage in East Dallas in line with the rapid renewal of her neighborhood. "We've got all the yuppies moving in. They want to put these little signs on the corners saying Coronado Hills, or maybe it's Coronado Heights," says Taylor, a 53-year-old self-described "aging hippie" who equates the price she paid for her house in 1974 to the cost of a new pickup truck today.
Because of the upswing in her neighborhood, Taylor's appraisal has nearly doubled in four years. "It's gone up ridiculously, but there's nothing you can do about it," she says.
As everyone who owns a home in Dallas knows, the value assigned to it by the Dallas appraisal authorities is an important number.
If the district says your house is worth $100,000, you paid about $2,700 last year in property taxes, minus exemptions if it was your primary residence or if you were over 65. If the appraisers said it was worth $10 million, the bite was $270,000, minus those same exemptions.
In this property-wealth-based method of paying for schools, police, jails, public hospitals and the like, Texas law says you are on the hook for taxes based on the full market value of your home.
Nice in theory. But in reality, it doesn't come close to working that way.
In Dallas, the more expensive your home, the bigger the break you'll likely be getting on your appraisal--and hence on your taxes.
If you owned one of the biggest, most lavish houses--say, a trophy estate in Preston Hollow or the Park Cities--the appraisal system gave you a 47 percent discount last year, almost half, right off the top, according to records of the most recent reported sales and appraisals.
If you were merely well-to-do and owned a majestic historic home on Swiss Avenue, you were on the hook for only 63 percent of the value of your house, according to the top 10 reported sales on that street.
If you were anything below that, chances are appraisers have you pegged on the rolls at 80 percent of market value or more--and you were made to pay most, if not all, of your share of the taxes under the law. For instance, a 1,100-square-foot house currently for sale on Coronado Avenue, a block away from Taylor's house, is on the 2001 rolls for 83 percent of its asking price. Another is at 84 percent, and that's only if it sells at full price. If you bought last year or early in 2001, your tax value is pegged at nearly full price.
If that sounds unfair--the Texas Constitution says property must be taxed equally and uniformly--there's more.
In 1997, the state Legislature passed and voters approved a measure to cap appraisal increases at 10 percent per year. The popular measure was sold as a benefit for the little guy, the fixed-income senior citizen swamped by the tax consequences of Texas' frothy real estate market, the cash-strapped soul who stood to lose his or her home.
But now that the cap is taking hold, it's become evident that the upper tier is getting the lion's share of the break, in both percentage and dollar terms. This year, according to Foy Mitchell, chief appraiser for the Dallas appraisal district, preliminary estimates show the cap is shielding about $2 billion worth of property from taxation in Dallas County, much of it in affluent neighborhoods where property values have risen the most.
Take the house of EDS founder Ross Perot, Dallas' top hand on the Forbes list of the world's richest people. (He's No. 104, with $3.8 billion.) From 1995 to 1999, four sizzling years for Dallas real estate, the appraisal district raised its valuation of Perot's 20-acre walled estate on Strait Lane a mere 4 percent. That followed a 1993 court case in which Perot had sued the district over what his 9,400-square-foot home--the pool, tennis and racquetball courts, rifle range and bowling alley--was worth.
In 2000 and 2001, however, the district decided Perot's estate was worth far more and in two years raised its value from $7.5 million to its current $17 million.
Because of the cap, however, Perot will be taxed this year as if the estate were worth $9.9 million--meaning he pays no taxes on about $7 million in value. For the city of Dallas, that's a loss of about $37,000 this year, based on 2000 tax rates and exemptions; for Dallas County, about $11,000.
And that's just one house. Estates owned by developer Trammell Crow, oilman Edwin Cox, golf-club mogul Robert Dedman Sr. and businessman Gene Phillips, who is facing a federal indictment for an investment scheme involving the mob, plus others in the chateaux district are getting multimillion-dollar markdowns this year, too.
"The cap has distorted the process so you find the people who you were attempting to help were helped somewhat, and the people who you didn't intend to help were helped a whole lot," Mitchell says. "Someone who is wealthy gets a great benefit, especially when there's been this great appreciation."
As for the other huge disparity in the accuracy of tax values--why Dallas seems so out of touch with the value of its most expensive homes--Mitchell and his staff have more elaborate explanations. At the top of the list is a state law that shields buyers from disclosing sales prices, a little-known privilege only the wealthy and their lawyers tend to utilize.
Mitchell says the secrecy provision, and a lack of information about renovations and custom-built homes, all but guarantee that the larger, more customized, more renovated, more distinct a house becomes, the more likely appraisers won't know what it's worth and will end up erring on the low side.
With more sales data to draw from and fewer custom features to complicate the picture, homes such as Wanda Taylor's are easier to track and appraise, appraisers say.
Plus, she doesn't have a posse of big downtown lawyers and accountants to challenge the district's facts and whittle down her taxes.
Reports of similar gaps in other growing cities suggest the problem is not Dallas' alone. An analysis of property records in America's five wealthiest counties, prepared for the Wall Street Journal in 1997, found the same pattern in those areas.
In Fairfax County, Virginia, homes costing more than $1 million sold for 71 percent more than their tax value, while smaller tract homes averaged just 8 percent higher, the newspaper's study found. The gap was even wider in Seattle, Washington, which was going full tilt that year in the technology boom.
One of the ritzy homes the paper singled out in its report was the mountaintop mansion of hotel heiress Leona Helmsley, a $25 million place in Paradise Valley, Arizona, vastly undervalued for property taxes by local appraisers. Helmsley, who was convicted of federal income-tax evasion in 1989, is perhaps best known for her remark, "Only little people pay taxes."
Taylor, who says she would like to add a half-bath to her house but is too pinched to pay for it, says she thinks Helmsley had it right. "I think the taxman gets what he can," she says. "We're easy to get."
Although the prices of their digs are sometimes overstated in the society columns, Dallas' rich and super-rich saw their home values soar well above their tax values during the last five years.
Take the most expensive home sale of 2000 for which the true sales price was made public through the tax appraisal process. As the sales brochure described the 4.7-acre estate on Park Lane, "Upon entering the gates, you will experience the feel of driving through the French countryside, with its perfectly manicured landscaping, picturesque creek with swans and rolling lawns..."
The five-bedroom, 12,448-square-foot French-style mansion, complete with pool, cabanas, tennis court, servants' quarters and stables, listed for $22 million, a Dallas record. Scott Ginsburg, who made his fortune in the radio business, bought it 18 days after it went on the market.
While society gossips had the closing price pegged at at least $20 million, Ginsburg, who later told a writer the 12-year-old place was being gutted and redone, actually picked it up for $10 million. Yet that was more than double the $4.3 million the house was appraised for on the tax rolls. So the previous owners, beauty-products barons Richard and Ginger Heath, got about a $123,000 tax break the last year they owned the house.
Foy Mitchell, the chief appraiser, says the Heath house was obviously undervalued by the county at the time it was sold.
So how did that happen?
"Before last year, we had nothing in our records that would have helped us support a value of $10 million on a 12,000-foot house, let alone $20 million," says Doug Gossom, the district's director of appraisal. "I can't just go in there and say it's worth $10 million. I have to have facts, comparable sales."
In 1999 and early 2000, Gossom says, the sheer number of high-dollar sales--fueled by the stock market and the tech/telecom/dotcom bubble--brought in more information. Prices spiked on the most exclusive Preston Hollow streets: Park Lane, Deloache Avenue, Strait Lane and the leafy lanes between.
Ginsburg's house helped fill in part of the picture.
During last year's round of appraisals, the district initially pegged the value of Ginsburg's spread at about $15 million. Like everyone else in the neighborhood, the new owner had kept the price to himself.
But Ginsburg took issue with the $15 million figure and last summer took his case to the district's appeals board. He made his point by showing his closing documents, which revealed the $10 million price, according to Mitchell and other district officials. Ginsburg declined to return calls seeking comment.
Gossom says that information was useful in valuing the 20,000-square-foot mansion Internet entrepreneur Mark Cuban bought in 1999 on Deloache Avenue. It's on the rolls this year for $11.4 million. "It's similar to the Ginsburg place, maybe a bit more quality," Gossom says.
Multiple land purchases by Excel Communications founder Kenny Troutt, who has assembled a stunning 30 acres along Inwood Road, and venture capitalist Tom Hicks, who has put together acreage for a big spread of his own, provided more details to support a big hike in land prices throughout Preston Hollow. Those began showing up on 2000 and 2001 tax appraisals, Gossom says.
One of the land-sellers was Perot, whose sale of a parcel to Troutt helped the district peg the price of Preston Hollow dirt at about $800,000 an acre, Gossom says. Prime hilltops are valued at about 20 percent more.
Mitchell says he needs this kind of data, not asking prices or rumored sales prices tossed around in the media, because these matters often end up in court. "These guys with this kind of property, they don't have a problem suing," he says. "Lawyers are not that big a deal to them. They sue and we go to the courthouse. The burden of proof is on us to support our figures. If we have no facts on which to base our values, we lose. We get stuck with attorneys' fees. There's no use tilting at windmills."
The need for solid information means the district will always lag behind current market prices, and even more so in the brisk big-estate market that appraisers and agents say peaked last year and is now leveling off.
The district's own price and tax value data show that the top 10 known sales in Dallas and the Park Cities averaged $5.1 million in 2000 and early 2001. Average tax valuation at the time of sale for the 10 estates was $2.74 million--just over half.
Dallas County Commissioner Ken Mayfield, who represents southwest Dallas County, says a fundamental matter of fairness is at stake, and he'd like to see the district do a better job of keeping up. "I want to be sure we're being equitable across the board," he says.
When former Texas Governor Bill Clements sold his Highland Park estate to John Muse, a Hicks partner, in early 2000, it had been on the rolls for $9 million and had not been adjusted higher for at least four years. This year, the tax district hiked the new value to $16 million, and Muse didn't object. Unlike Perot, new purchasers such as Muse get no immediate benefit from the 10 percent cap. In fact, the district's methods tend to hit the new homeowner with full values and lag in varying degrees on the rest.
Early last year, real estate entrepreneur John Amend bought "Mount Vernon," the often-mocked copy of the original that oilman H.L. Hunt built at the edge of White Rock Lake in 1929. It was valued for taxes at $3 million, a number that hadn't risen in years. The district prodded sale documents out of Amend that showed he had paid $10 million, more than three times the taxable value at the time of the February 2000 sale. The seller, and beneficiary of the low appraisal, was Ray Hunt, CEO of Hunt Oil Co., deed records show.
Mitchell and chief appraisers elsewhere in Texas say the state's nondisclosure of sales prices puts them further behind in appraisals of expensive estates than other residential property. "The Legislature says I am supposed to value the property at market value, but they conveniently forgot to put in the statutes that you must share the sales price," Mitchell says. "For the home you or I would live in, there are ample sales data. Most list through [real estate industry] multiple listings. If it's a tract neighborhood, you get the numbers for the four or five models, and they are very, very easy to appraise. None of these estates list through multiple listings and the sales prices are closely guarded. It puts us further behind the curve."
Although it tends to help only the wealthiest homeowners, disclosure of sales prices ranks somewhere along with a state income tax as an idea whose time has not, and may never, come, tax appraisers say.
The Texas Association of Appraisal Districts has introduced or tried to introduce disclosure legislation in 15 of the past 20 legislative sessions, and a bill never has been voted out of the tax-writing House Ways and Means Committee.
"At least part of the opposition has come from folks in real estate who want this information to be private. They guard comparable sales with a lot of care," says association executive director Doris Koch.
That doesn't seem to be a problem for real estate agents in the 43 states that disclose sales prices. Of the seven that don't, Texas is the only one without a state income tax and hence relies so heavily on property-tax revenue.
Robby Briggs, a Park Cities agent whose firm specializes in high-dollar property, says real estate agents have no special interest in keeping prices private. If sales prices were known, the market would be more efficient, especially in the "thin" segment of expensive homes, where prices move up and down quickly, he says. "It would educate sellers. A lot of times, I'm the one paying for the advertising and carrying the property until the seller gets realistic."
Briggs, who has been in the business for 21 years, says tax appraisals are only one of several reasons property owners don't want public disclosure of sales prices. The other is they don't want a public record of what they paid because they believe it could put them at a bargaining disadvantage when it's time to sell.
In Austin, chief tax appraiser Art Cory says that there is a lot of opposition to sales-price disclosure, "but I don't know why. It seems to me everyone would be better off if we had the tools to do the job. But I had one guy in the Legislature tell me, 'If it's good for the tax district, it's gotta be bad.'"
Says Mitchell, in Dallas: "I'm not gonna name any names, but I have two members from the Legislature who are protesting their values right now, and I can't get closing statements from them. We're having to try to follow up with subpoenas [which can be sought by the appraisal board]. Now that's not the way it should work, but that's the way it works."
While secret prices help the wealthy confound the taxman, the middle and upper-middle swath of homeowners has at least one trick in the bag: home renovation.
Because tax appraisers make their evaluations from the street, they have little idea whether a house is plain vanilla inside or stuffed with brand-new $3,000 commercial-grade stoves, slab granite countertops, marble bathrooms, media rooms, halogen lights and other pricey features that can greatly increase a house's value.
In theory, the homeowner or the contractor is required to state the size and approximate value of those renovations when they take out building permits. In practice, appraisers say, these self-declarations and reality often don't match.
"In the M Streets we'd see people take out permits for a bathroom renovation, and they'd remodel the whole house," Gossom says.
The district, which tacks these self-declared dollar figures onto taxable valuations, is aware of the widespread under-reporting and tries to get a handle on the extent of the work. But a look at one of the city's most-renovated streets, Swiss Avenue, shows vast differences between what the district knows and what is actually going on.
Take 4946 Swiss Avenue, a stern-looking but highly renovated 1913 Prairie-style home that is being advertised for sale at a street-record $1.5 million. The sales flier for the "former Bishop Lynch home on famed Swiss Avenue" touts side-by-side duel-fuel Thermador ranges, two dishwashers, a refrigerator "system," kitchen island, media room and 7,000 square feet of living space.
"This square-footage figure is a problem right off the bat," says Gossom, when asked why the appraisal district thinks the house is worth only $688,200, less than half the asking price. While square-footage records are never exact, the house is listed on tax records as being 1,500 square feet smaller than what is pitched on the sales brochure. The district says the last building permit it's aware of was taken out in 1998, when a declared $100,000 renovation job was started.
The house's owner, Hassan Parsa, said on a recent evening that he was too busy to comment because he was dealing with workmen inside. The next day, he declined comment altogether.
The district's records also don't jibe with the sales brochure at 5647 Swiss, which is advertised as a newly renovated three-story Prairie-style home with a new 14-by-16-foot home theater recently built on the third floor. The tax district sketches available on the Internet don't even show the existence of a third floor.
On the tax rolls, the 4,632-square-foot house is worth $493,000. In the sales brochure, it's 5,135 square feet, and yours for $895,000. Three other similarly sized homes on the street are for sale in the upper $800,000s, and one is currently under contract.
While Gossom at first scoffed at the suggestion that a home on Swiss could bring a price in the $1 million range, he changed his view after talking with his staff. "They say $1 million on Swiss is very possible," he says. "We'll have to give that area some attention next year."
As in Preston Hollow and the Park Cities, the prices of some of the largest sales on Swiss over the past year are not known to the taxing district.
Of the known sales between mid-1999 and early this year, the average home sold for $610,000, records reviewed by the Dallas Observer show. The average appraised tax value at the time of sale was $384,000, about 63 percent of market value.
Larry Johnson, a Swiss Avenue homeowner who has made his living in real estate, says a lot of residents on the street have finished out their third-story attics, "and probably they should count it" as square footage. But Johnson has his own ideas about why home tax appraisals seem to be so off-base. "The appraisers aren't very good," he says. It takes considerable knowledge and effort to value houses on a street such as Swiss, and he says he has seen little of either in his dealings with appraisers over the years.
Gossom and Mitchell take issue with that but concede that mass appraisals will never be as precise as fee appraisals done for lenders. "I have 640,000 properties to appraise, and we do half that file every year," Gossom says.
Mitchell says the law requires that all properties be re-appraised every three years, including those in areas such as southeast Dallas County that tend to change little from year to year. "When an area falls behind...we concentrate there," he says.
Talking in his spacious, unrenovated living room, Swiss resident Johnson doesn't seem to be afraid that he's waving a red flag in front of a bull by knocking the district. His house, a stately brick Greek Revival-style home on one of the boulevard's grandest blocks, is appraised at $287,000. "I tried to sell it last year for $500,000. People hurt my feelings and didn't take it," he says, pointing to a sagging spot in the ceiling and a patch of dry rot on the front-porch pillar. "It looks better from the street."
Still, Johnson says he wouldn't sell it for $287,000. The lot alone is worth most of that. Indeed, in May 2000, Johnson's neighbor's house--which is about a third larger--sold for $620,000, district records show. In a subsequent public fight over the historical propriety of his renovations, the owner, lobbyist David Dean, told reporters that the place was so dilapidated, it had pigeon droppings and rat urine staining the floors. Although Dean saw fit to pay $620,000 on the open market for such a fixer-upper--a fact known to the district--the district put him on the rolls this year and last for $495,000.
"That's a mistake," Mitchell says. "It should be on for 100 percent."
So what can the little guy do?
Perhaps there's something to learn from Ebby Halliday, grande dame of Dallas residential real estate sales. The tax appraisal of her Antebellum-style house on Preston Road didn't go up at all between 1996 and last year, when it was appraised at $425,300. Actually, it went down $10,630 over those years, a drop of 2 percent.
In that same period, according to Texas A&M University's real estate center, the price of an average home in the region increased 20 percent.
"It dropped because there was an appeal...a complaint about traffic and noise on Preston," says appraisal district spokeswoman Cheryl Jordan.
In other words, even a beautiful home on Preston can be devalued if a savvy owner presents the right information. (Like a lot of her neighbors who were flatlined for years, Halliday's valuation went up this year, to $504,000.) "I wasn't aware we'd made that complaint," says Halliday, who didn't personally make the appeal. "The traffic there has grown tremendously."
Armed with pictures of leaky gutters and crumbling foundations, or represented by retinues of tax accountants and lawyers, about 70,000 homeowners are appealing their appraisal hikes this year in hearings that are going until July 15.
District officials say they regularly hear from slumlords who bring in their code violation notices as proof their shabby rent houses should be taxed lower, and ordinary homeowners who can't believe the value of their lot doubled because speculators bid up one or two parcels down the block.
Ross Perot appealed his this year. Make that a team of tax experts from Deloitte and Touche appealed, and succeeded in knocking $2.7 million off the original $19.7 million appraisal. Kenny Troutt, whose buying spree has made him the district's most-taxed homeowner with $30 million worth of land, is appealing, too.
"This staff is told their job is to get the correct value, not the high, not the low," says Mitchell, adding that his staff is willing to listen to any appeal based on supportable facts.
"I'm the last person who'll let the rich person get away with something the little guy can't get away with," he says. "If we're missing, we are missing within the framework of the law...Without mandatory disclosure of sales prices, there's a problem in the framework. That's the story. I'm willing to take all the hits you might dish out if you'd only print that."
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