County assessors across Arizona have recently issued supplemental notices of value for the upcoming 2024 tax year. These notices are typically given when there is new construction, parcel splits or consolidations, or a change in a property’s use. However, many Arizona taxpayers may not be fully aware of the significant impact of these supplemental notices, especially in the context of “Rule B” valuations.

Since the implementation of Proposition 117 in 2015, which imposed a 5% limitation on property valuations, there has been a tendency among Arizona taxpayers to overlook the importance of monitoring their property’s valuation. Failure to carefully review a supplemental notice can result in missing a valuable opportunity to reduce a property’s tax liability not only for the current year but also for the entire lifespan of the property. This is because a supplemental notice triggers what is known as a “Rule B” valuation.

Understanding the mechanics of a “Rule B” valuation is crucial. Consider the scenario of a newly constructed apartment completed in March 2023. The county assessor issues a supplemental valuation for tax year 2024 in September 2023, setting a total cash value (FCV) of $30 million. In Arizona, the FCV is synonymous with market value, but the Limited Property Value (LPV) is what matters most to taxpayers, as property taxes are calculated based on the LPV.

The LPV is established using a “Rule B” ratio, which is the ratio of the average LPV to the average FCV for similar properties in the same classification within the county. These ratios vary by county, property class, and tax year. For instance, in Maricopa County, for the 2024 tax year, the Rule B ratios are 43% for vacant land, 55% for commercial property, and 51% for rental residential property.
If we apply Maricopa County’s Rule B ratio to our example of the newly constructed apartment with an FCV of $30 million, the LPV would be set at $15.3 million. Notably, the property’s tax liability is then calculated solely on this LPV.

The once-in-a-lifetime opportunity arises when taxpayers successfully appeal and reduce the FCV. If, for example, the FCV is reduced to $25 million, the LPV will also decrease proportionally to the Rule B ratio, resulting in a reduced LPV of $12,750,000.

The significance of this opportunity becomes evident when considering the alternative scenario of missing the deadline to appeal the 2024 supplemental notice. If the appeal is delayed to the 2025 tax year, despite reducing the FCV to $25 million, there will be no tax savings. This is because a reduction in FCV alone only reduces the LPV if a Rule B valuation is triggered by new construction, re-parceling, or a change in use.

Failure to seize the Rule B valuation opportunity could lead to paying 17% more in Arizona property tax annually over the property’s life, resulting in potential additional costs of $435,000 or more over the first ten years.

For taxpayers wishing to appeal their valuation, it’s crucial to act within 25 days from the mailing date of the supplemental notice. Even if this window is missed, there is still an option to initiate a lawsuit in tax court by December 15. The takeaway for property owners is clear – challenging a supplemental notice is a once-in-a-lifetime opportunity to significantly reduce long-term property tax liability, and complacency could prove costly over the property’s lifespan.