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I've been thinking about investing in local real estate lately, and there's an unusual (to me) practice here of funding some of the city provided infrastructure (water, roads and lighting I guess) by a special property tax for 20 years. I'm curious what, if anything, happens to property value as that date approaches.

Naively, I'd expect a bump in prices the day the tax expires, as buyers try to avoid the extra payments. I have a feeling though that the intuitive, theoretical and experimental answers will all be different. So is there a good way to think about predicting the effects of tax expiration and confirm expected results in real life?

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The simple answer is that the price is adjusted by the present value of the future payments under the special tax.

The present value of $1000 dollars a year at 3% for twenty years is $14 877, For ten years it's $8530.

=pv(.03,20,1000) //in Excel

So if the special assessment expires in 10 years, your market price should be ~8000 less than the untaxed market price.

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  • +1 for the nice Excel example. We agree, my answer was just long-winded. – JTP - Apologise to Monica♦ Nov 10 '11 at 18:43
  • So the property tax paid is offset by increases in home equity then? – jldugger Nov 10 '11 at 20:17
  • I suppose you could say that - Current market value will increase as the special tax is paid off, but ONLY if the tax has a fixed end date. Certainly if you refused to pay the tax, your selling price would drop by the amount of tax owing on closing. – Chris Cudmore Nov 24 '11 at 16:01
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I'd imagine this is already priced in. Say, for whatever reason, a condo had a know $5000/yr assessment, for 10 years. As a buyer in year 1, I know I'll have that outflow for 10 years and it's part of my math in valuing the purchase. Each year the value changes as the $5K/yr outflow is scheduled to end. But it's never a surprise, it's documented, planned, and priced in. In the final year, the home value jumps $5K only as you make the final payment.

Sudden jumps or drops in value come from unexpected events. The day that $5K assessment is made public, the value drops, say $40K, or whatever the present value is of this cash stream. In your example, the numbers right till the end are known, and there's no sudden jump in the value of this property.

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