Overview of Arizona Real Property Tax

FCV and LPV - In Arizona, real property is assessed and taxed by the county where the property is physically located on an annual basis. Property is valued in Arizona by using two valuation figures, the Full Cash Value (“FCV”) and Limited Property Value (“LPV”). In Arizona, the FCV by definition is the current market value of the property. The LPV is a statutorily prescribed value that is intended to limit the increase of property taxes. While the FCV can increase or decrease each year by any amount, the LPV by law must increase each year by the greater of (1) Ten percent of the prior year’s LPV, or (2) Twenty-five percent of the difference between the current tax year’s FCV and the prior tax year’s LPV. The FCV is associated with the secondary tax rate that is used to fund bonds, budget overrides, special districts (fire or flood control), and other limited purpose districts. The LPV is associated with the primary tax rate that is used to fund operational expenses for the government and school districts.

Assessment Ratio - As part of calculating real property tax in Arizona, an assessment ratio that is determined by the type of property is applied to the FCV and LPV prior to applying the primary and secondary tax rates. The three most common assessment ratios are as follows: (1) Commercial property is assessed at 25% of FCV and LPV, (2) Residential property is assessed at 10% of FCV and LPV, and (3) Vacant Land is assessed at 16% of FCV and LPV.

Calculation of Tax - To calculate Arizona real property tax, the Full Cash and Limited Property Values, the Assessment Ratio, and the Primary and Secondary Tax Rates must be known. The calculation is as follows: (FCV x Assessment Ratio x Secondary Tax Rate) + (LPV x Assessment Ratio x Primary Tax Rate) = Current Tax.

Valuation Methods - Arizona currently recognizes three different methods to value real property for taxation purposes: the Cost, Market, and Income methods.

• The cost method of valuation uses the construction/replacement cost of a facility to determine its value. Arizona uses a cost modeling system to determine the cost of a building. However, actual cost data can also be used.
• The market method of valuation uses similar properties ("Comps") that are located in similar areas and have recently sold. The more closely related the buildings, use, size, location, etc., the stronger the case is for using that value.
• The income method of valuation uses the income and expense generated by a property and capitalized to determine its valuation. This method requires three years of income and expense data. Although less than three years data can be submitted if that is all that is available, this partial data is not given much weight when attempting to reduce a property’s valuation.

Appeal Process - A property’s valuation in Arizona is determined one year prior to the tax year. For example, preliminary 2003 Arizona real property valuations were determined in February of 2002. Once a taxpayer receives a “Notice of Valuation” from the relevant county assessor’s office, the taxpayer has 60 days to file an appeal and begin the appeals process. There are three levels of appeal, two administrative levels and one judicial level. The appeal process begins by filing a petition with the relevant county assessor based on one of the three recognized valuation methods. The final determination of the county assessor's office may be appealed to the State Board of Equalization ("SBOE") and then to the Arizona Tax Court.