Property Tax Time Bombs: How Reassessment After Sale Destroys Your Pro Forma

Why trusting seller tax numbers is a million-dollar mistake

Here's a story that should keep every real estate investor awake at night: A seasoned commercial investor in Dallas purchased what appeared to be a solid industrial property for $8 million. The seller's financials showed annual property taxes of $48,000—a reasonable 0.6% of the purchase price. The pro forma looked bulletproof. The deal closed smoothly.

Twelve months later, the tax assessor's notice arrived: $267,000 in annual property taxes. A 450% increase that instantly vaporized the property's cash flow and turned a "can't miss" investment into a financial disaster. The culprit? The property had been assessed at $2 million when the previous owner bought it years earlier, but reassessed to the $8 million sale price after the new purchase.

This isn't an anomaly—it's the predictable outcome of trusting seller tax numbers without understanding how property tax reassessment works. And it's costing investors millions because they're treating the most predictable "surprise" in real estate like it's unforeseeable.

Here's what most investors don't realize: property taxes reset upon sale in the vast majority of jurisdictions. When you purchase a property, you're not just buying the building and land—you're triggering a reassessment that will adjust the tax burden to reflect your purchase price, not the seller's historical assessment.

Why does this happen? Property taxes are based on assessed value, which is supposed to reflect market value. When a property sells, that sale price becomes the clearest indicator of current market value, and assessors use it to establish a new tax basis.

The myth that kills deals: "We'll use the seller's tax history to project future taxes." The reality: Seller tax numbers are irrelevant the moment you close. Yet studies show that 60-70% of investors use historical tax figures in their underwriting, creating NOI overstatements of 10-30% on average.

Critical Warning: Every dollar you underestimate in annual property taxes reduces your property's actual value by $12.50-$20.00 depending on your cap rate. On a typical commercial property, missing $100,000 in annual taxes equals a $1.25-$2 million overvaluation.

Not all jurisdictions assess property at 100% of market value. Many use assessment ratios—the percentage of market value that gets assessed for tax purposes. Common ratios include:

The mill rate (or tax rate) determines how much you pay per $1,000 of assessed value. A mill rate of 20 means you pay $20 for every $1,000 of assessed value, or 2% of the assessed value.

The Tax Calculation Formula:
Sale Price × Assessment Ratio × Mill Rate = Annual Tax Bill

Purchase Price: $8,000,000
Assessment Ratio: 100% (Texas assesses at market value)
Mill Rate: 33.4 mills (3.34%)
Calculation: $8,000,000 × 100% × 3.34% = $267,200 annual taxes

Seller's Historical Taxes: $48,000 (based on $2M assessment)
Difference: $219,200 additional annual expense
Impact on Property Value at 6% Cap Rate: $3.65 million overvaluation

Property tax reassessment isn't uniform across the United States. Understanding your state's approach is critical for accurate underwriting.

California and a few other states limit annual tax increases to 1-2% per year, but full reassessment occurs upon sale. A property purchased in 1985 for $1 million might have taxes based on $1.8 million today, but selling for $5 million triggers immediate reassessment to the full sale price.

Most states reassess annually or upon sale, with no limits on increases. Texas, Florida, New York, and Illinois fall into this category, where your tax bill can increase dramatically overnight.

High-Tax State Alert: New Jersey, Illinois, Texas, and New Hampshire have effective commercial property tax rates above 2%. In these states, a $10 million property purchase can generate $200,000+ in annual taxes—often double what sellers have been paying on older assessments.

The relationship between property taxes and property value isn't linear—it's multiplicative through the capitalization rate. Every dollar of underestimated annual expense reduces property value by the inverse of your cap rate.

At 5% Cap Rate: $1 in taxes = $20 reduction in value
At 6% Cap Rate: $1 in taxes = $16.67 reduction in value
At 8% Cap Rate: $1 in taxes = $12.50 reduction in value

Property: 150,000 SF Office Building
Purchase Price: $20 million
Seller's Annual Taxes: $120,000 (based on $6M assessment from 2018)
Gross Income: $2,400,000
Operating Expenses: $1,200,000 (including $120K taxes)
Seller's Stated NOI: $1,200,000

New Assessment: $20 million (purchase price)
New Annual Taxes: $380,000 (1.9% effective rate)
Additional Tax Burden: $260,000
Actual NOI: $940,000
NOI Reduction: $260,000 (21.7%)

Value Based on Seller NOI: $18.46 million
Value Based on Actual NOI: $14.46 million
Overvaluation: $4 million (20%)

Beyond regular property taxes, two additional categories can significantly impact your tax burden:

These are charges for specific infrastructure improvements like new roads, water lines, or streetscaping. Special assessments can add 10-25% to your regular tax bill and often aren't disclosed in seller financials.

TIF zones redirect property tax increases to fund development projects. While this can limit your tax increases, it can also mean higher base rates and special obligations that persist for 15-30 years.

Follow this step-by-step methodology to determine accurate property tax projections:

Example Calculation:
Purchase Price: $15,000,000
Assessment Ratio: 80%
Assessed Value: $12,000,000
Mill Rate: 25 mills (2.5%)
Base Taxes: $300,000
Special Assessments: $15,000
Buffer (7%): $22,050
Total Projected Taxes: $337,050

Property tax appeals can provide relief, but they shouldn't change your underwriting assumptions.

Most jurisdictions provide 30-60 days after assessment notice to file appeals. The process typically involves:

Successful appeals typically achieve 10-15% reductions in assessed value. Appeals work best when:

Underwriting Rule: Always underwrite to the full reassessed value, regardless of appeal plans. Treat any successful appeal as upside, not as a base case assumption.

A private equity group was evaluating a 200,000 square foot industrial property in suburban Chicago listed at $25 million. The seller's pro forma showed annual property taxes of $180,000, based on the $8 million assessment from their 2015 purchase.

The Seller's Story: The property had been cash-flowing beautifully for years, with taxes representing just 0.72% of the potential sale price. The NOI appeared strong at $1.8 million, supporting the $25 million valuation at a 7.2% cap rate.

The Due Diligence Reality Check: The buyer's team calculated post-sale taxes using the $25 million purchase price as the new assessment base. Cook County's effective rate of 2.0% meant annual taxes of $500,000—not $180,000.

The Financial Impact:

The Outcome: The private equity group walked away from the deal. Six months later, after sitting on the market, the property sold for $19.5 million to a buyer who understood the true tax implications—validating the original buyer's conservative analysis.

Property taxes represent the most predictable "surprise" in commercial real estate. The reassessment upon sale is automatic in most jurisdictions, mathematical in its calculation, and devastating when ignored.

Professional investors understand that using your purchase price as the tax basis is the only conservative approach. This single adjustment separates successful investors from those who learn expensive lessons after closing.

Remember: Property taxes aren't just another line item—they're a direct reflection of your investment decision. Pay more for a property, and you'll pay more in taxes. Factor this reality into your underwriting, or the market will factor it into your returns.

The difference between a profitable investment and a financial disaster often comes down to this simple question: Are you underwriting to the seller's tax history, or to your purchase price reality?

"Insurance Reality Check: Why Seller Numbers Are Dangerously Outdated"

Next in Article 4 of our series, we'll tackle another critical expense that sellers consistently understate: Insurance. With commercial insurance premiums increasing 15-25% annually and catastrophe coverage becoming increasingly expensive, we'll show you why getting your own independent insurance quotes during due diligence is non-negotiable—and how failing to do so can cost you $50,000+ annually in unexpected expenses.

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