District residents who own their homes do not generally pay taxes on the full value of their properties. If your District property is your primary residence, the amount you get taxed on will be different from your assessment. First, you are exempt from taxes on the first $70,400 of your house value (this is called homestead deduction, and it is adjusted every year for inflation). Second, you are protected from the tax implications of large upswings in home values by the assessment cap. Your taxable assessment, which is what you pay taxes on after the homestead deduction, cannot grow by more than 10 percent each year. (These two tax relief policies are not unique to the District; more on this will come this week). The two policies combined reduce the taxable assessments for all District homesteads, but their combined effects vary by home values and neighborhoods. (In addition, seniors with incomes below $127,100 get a 50 percent reduction on their final tax bills).
The homestead deduction is more valuable in low-value houses. Because it is a flat amount ($70,400 this year), the homestead deduction produces a relatively bigger tax break for properties that have lower assessed values. If the tax office assessed your home’s value at $300,000, you would be taxed on $229,600, or 77 percent of your home’s market value. If your assessed value were $1.3 million, your would pay taxes on $1.23 million, or 94 percent of your home’s market value.
The 10 percent cap on tax assessments is more valuable in neighborhoods with rapid growth. Going back to our example, a homestead property of $300,000 would be taxable over $229,600. At 85 cents for each $100 value, the tax would be $1,951. Let’s say the assessed value of this property grew by 33 percent to $400,000 in one year. If there were no caps, the new taxable assessment would have been $329,600. The cap, however, limits the taxable assessment growth by 10 percent, thus the owner would only pay taxes over roughly $252,560 ($229,600 times 110 percent). The cap is removed once the house is sold to a new owner.
Looking at the District residential properties that are eligible for homestead deduction and assessment caps, we find the following:
- More than half the District properties are eligible for homestead deduction, and potentially, the taxable assessment cap. Of the 178,300 residential properties, approximately 95,876 are homesteads eligible. (This figure is only for properties that are purely residential such as single family homes, row houses, apartments and coops. It excludes mixed-use developments).
- Among these homestead properties, the two tax provisions reduce taxable assessments by about $10 billion, or down 28 percent. In Tax Year 2015, the total assessed value of homestead properties was $53.8 billion; only $44.2 billion of this amount was taxed. In Tax Year 2016, the comparable numbers are $57.3 billion and $47.3 billion (the 2016 data could change since people have a chance to appeal).
- In the absence of these deductions, the real property taxes would have been $72 million higher every year. Given the $10 billion difference, the number is indeed lower than the 85-cent rate would bring. This is because seniors, who own 19,200 properties in the District, are eligible for a 50 percent tax reduction.
- The divergence between full and taxable assessments is greatest among lower valued homes. Among properties assessed below $300,000, the taxable assessments are 65 percent of full assessments–that is, homeowners only pay taxes on 65 cents out of each dollar of assessed value. Among mid-valued properties (assessed between $300,000 and $750,000), the taxable assessment are 78 percent of full assessments. Among properties valued over $750,000, the comparable ratio is 92 percent.
- Finally, the divergence between full and taxable assessments is greatest in east of the river neighborhoods and in neighborhoods that have been growing rapidly. In the Congress Heights neighborhood, for example, the taxable assessments are only 56 percent of the market assessments. In neighborhoods where values are growing fast, such as Eckington and Riggs Park, the taxable assessments are at about 67 to 68 percent of market assessments. In the northwest quadrant, especially west of Rock Creek Park, taxable assessments are closest to market assessments. This is because the housing values in these neighborhoods are very high, and they grow at much slower rates (3 to 4 percent annually). The 10 percent cap does not bind forever, since taxpayers eventually catch up for previous tax reductions until their taxable assessment is exactly $70,200 lower than their market assessment. Such is the case in neighborhoods west of the Rock Creek Park.
Here is a map of District’s neighborhoods by the ratio of taxable assessments to market assessments. Darker colored neighborhoods have market and taxable assessments closer to each other.
What exactly is this data? We use current and proposed market and taxable assessment data from District’s real property tax database as extracted on 29th of February this year. The data only covers homestead properties and properties that receive senior tax reduction. It also only focuses on non-mixed use properties.