Secret #76 - A Huge Property Tax Loophole for Land Speculators

In a lot of places, including in metro Phoenix, property tax rates on land are often based on the land’s current use value instead of its current market value. 

A piece of land right outside of town might be worth a ton to developers because of its value for building houses but the property tax rate the land owner actually pays may be far, far less than the rate home owners in the area pay because of a crazy property tax loophole for land owners. 

The property taxes in these places are not based on the land’s fair market value – like it is for home owners – but on the value of the land’s current use. It could be a prime piece of land for new home developers but if it’s currently used as an alfalfa field, the property tax is based on the land’s value as a farm, not on the land’s fair market value. If it’s vacant land, the landowner might put some cattle on the land for a while each year so that the property tax is based on the grazing value of the land, not the fair market value of the land. 

This reduces the owners annual taxes and which makes speculating in land more profitable and drives up land prices and subsequently new house prices. 

The tax break encourages land owners to delay developing the land since their property taxes are so low, and to simply watch the land appreciate effortlessly in what is called “land banking.”

They keep the land in agricultural uses to keep the property taxes down, which makes it cheaper to NOT develop the land and to just ride the wave of land price appreciation without doing anything.

If land owners had to pay property taxes based on the current market value of their property – like home owners do – the land would be cheaper and the land owners would sell the land to home builders sooner, and the supply of houses would increase faster.