Verified applicable law and evidence establish that a buyer will face a higher sustainable property-tax burden after this transaction. Which tax expense belongs in the stated forward income model?
Correct Answer
B) The supported anticipated buyer burden under those rules.
Tax projection must reflect the supported law and anticipated burden applicable to the property and buyer. A sale does not universally trigger reassessment at price nationally. Here the increased burden is stipulated from verified applicable rules; do not carry stale taxes or assume an unestablished appeal.
Why This Is the Correct Answer
Option B is correct because the forecast should use the supported anticipated tax burden the buyer will bear under the applicable rules. The buyer's anticipated property tax expense is what reduces the income stream a buyer would receive. Using a figure that verified law and evidence show is outdated would overstate NOI.
Why the Other Options Are Wrong
Option A: The seller’s lower amount, as it appears on last year’s bill.
Option A, the seller's lower amount from last year's bill, is wrong here because the facts establish that the buyer will face a higher sustainable burden. Carrying the stale figure would overstate the income a buyer can expect.
Option C: Zero tax, because the transaction is tax-exempt.
Option C, zero tax because the transaction is tax-exempt, has no support in the facts. The stem states that the buyer will face a higher property tax burden, not an exemption.
Option D: An unsupported reduction based on an assumed successful appeal.
Option D, an unsupported reduction based on an assumed successful appeal, is speculative. Forecast expenses should rest on supported evidence, not on an outcome that has not been established.
Forecast the buyer's bill
In a forward income model, use the supported tax the buyer will pay, not last year's bill or a hoped-for reduction.
How to use: Use this when historical and anticipated tax expenses differ.
Exam Tip
Choose the supported, forward-looking expense; reject options based on stale figures or unestablished assumptions.
Common Mistakes to Avoid
- -Using the seller's historical tax bill when evidence shows it will change
- -Assuming a successful tax appeal without support
- -Assuming every sale triggers reassessment regardless of the applicable law
Concept Deep Dive
Analysis
This question tests forecasting property tax expense in a forward-looking income model. When applicable law and evidence establish that a buyer will face a higher sustainable tax burden, that anticipated amount belongs in the forecast. Stale historical taxes or speculative reductions would misstate NOI.
Background Knowledge
Expense forecasts in the income approach should reflect what a typical buyer would expect to pay going forward. Property tax rules vary by jurisdiction; a sale does not trigger reassessment everywhere, so the forecast should follow the rules verified for the property.
Real-World Application
An appraiser in a jurisdiction where verified rules call for reassessment after a sale learns the subject's taxes will rise. The appraiser forecasts the higher supported tax in the operating expenses rather than the seller's historical bill.
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