House under-appraised (tax appraisal)

Question

I know someone whose house was massively under-appraised (tax appraisal) after it was constructed on their lot due to some sort of glitch or misunderstanding.

It turns out the appraisal was much lower than the actual value of the home ( maybe 2x-3x too low, so say 500K vs. 1.5M), based on neighboring properties and attributes of the house. From what I understand, there was a house on the lot in the past that no longer existed at the time the lot was purchased. That house was much older and smaller than the house that was constructed, but the appraisal and whatever other documentation exists seems to suggest whoever did the appraisal thought the previous structure was the one being built, or something like that.

I don't know much about real estate, but my first thought is that they've essentially had much lower property tax than they otherwise would have for years now. So my question is - if the local government knew they had under-appraised the property, would they try to hold the homeowner liable for the lost tax burden? Even though it was their screw-up? Are there laws regarding this type of thing?

And are there other implications this could have, good or bad?

Answer 1

I settled my mother's affairs 20+ years ago. Because the home of my childhood was in another state than her retirement domicile, it was required by the IRS that I use a licensed professional appraiser to value it for her modest estate. You couldn't just find a local realtor for an estimate since the IRS wants to avoid the impropriety of finding said realtor and slipping them a few bucks to undervalue the house in order to avoid paying taxes. The IRS always wants its pound of flesh, eh?

The house design was unique to this area, probably something more suited for Arizona than New York. The appraiser did not like the style and appraised the house for 20% below market value. He included these comments in the appraisal. Upon receiving this report, I contacted the local lawyer and asked him what, if any ramifications there might be and he indicated that there were none since all of this had been done at arm's length (the out of state lawyer provided the appraiser) . IOW, none the parties at either end of the line knew each other or had any relationship. Within the year, I sold the home for full value.

Though nowhere near the undervaluation in your story, I would surmise that the ramifications are no different. If the previous appraisal(s) were made in good faith then there should be no ability to claw back the lost tax burden. I'm not a lawyer so all of this is just speculation. If there is genuine concern about this problem, contact a lawyer and get a professional opinion regarding these circumstances.