How is property classified?

Property is classified according to how it is used. For example, a state may have multiple classes of property, all of which are taxable. Examples of classes of property are included below.

Property Classifications

Class 1. Agriculture, grazing, livestock, notes, bonds, stocks, accounts receivable

Class 2: Residential, farm, homes

Class 3: Commercial properties

Class 4: Motor vehicles

Class 5: Personal property, except motor vehicles

Class 6: Swamp, vacant, waste or abandoned or undevelopable land

Property is described using these types of classifications for tax purposes. With classifications like these, governments can tax different parcels differently, or even tax parcels of equal market value differently. For instance, a residential property can be taxed at 60% of market value, while industrial real estate may be taxed at 90%.

Property Use Types

Many properties may actually fit into more than one classification based on use type. Because it may be to the taxpayer’s advantage to be in a certain classification, lawyers can often help one decide how a property should best be classified. Arizona, for example, allows for “mixed uses” when property has more than one legitimate use. This can be used, for example, to lower a higher residential rate to the land rate. So in Arizona, it is not uncommon to mix two of these three most common classes: residential (with a tax rate of 10%), commercial (taxed at 20%) and land (16%).

Property Taxation

Governments collect taxes based on such classifications, but the tax principles involved sometimes don’t seem fair to the taxpayers. This is sometimes because the unequal taxation is used to encourage (or discourage) certain types of building, land use planning, and even business. However, this does not mean that taxpayers cannot challenge, or change, the way their property has been classified. In fact, taxpayers have rights to challenge regardless of the system’s fairness or even accuracy.

Getting Help

Keep in mind that changes to classifications can also be requested by the taxing authority. Taxpayers must be told of any proposed changes (increases), and it’s important to act quickly to protect your legal rights in understanding such changes. An experienced tax attorney can be an invaluable source of information and guidance in such situations.

Exploring Case Studies: The Impact of Property Classifications

Case Study 1: Agricultural Land vs. Residential Property

Mr. Johnson owns a large plot of land in a rural area. Initially, the land was classified as agricultural (Class 1) due to its use for farming and livestock. However, Mr. Johnson plans to build a residential property on a portion of the land.

He seeks legal advice to determine if he can change the classification to residential (Class 2) for tax purposes. With the help of an experienced tax attorney, Mr. Johnson successfully convinces the taxing authority to reclassify the land, resulting in a lower tax rate.

Case Study 2: Mixed-Use Property in Arizona

Ms. Smith owns a property in Arizona that serves both residential and commercial purposes. The property is currently classified as residential (taxed at 10%). However, Ms. Smith believes that the land portion of her property should be classified separately as land (taxed at 16%) to lower her overall tax burden.

She consults a lawyer specializing in property taxation, who guides her through the process of requesting a mixed-use classification. With the lawyer’s assistance, Ms. Smith successfully obtains the desired classification, resulting in reduced property taxes.

Case Study 3: Challenging Property Classification

Mrs. Rodriguez owns a commercial property (Class 3) that she believes has been incorrectly classified, leading to higher tax obligations. She decides to challenge the property classification to seek a fairer taxation rate. Mrs. Rodriguez engages an experienced tax attorney who thoroughly analyzes the property and identifies discrepancies in the classification process.

Through the attorney’s guidance, Mrs. Rodriguez files a formal challenge and presents evidence supporting her claim. The case goes through a legal review, and ultimately, the property is reclassified, resulting in significant tax savings for Mrs. Rodriguez.