If I pull a building permit in Kansas, will my property taxes go up by the value I wrote on the permit?

Plain-English summary

A homeowner or business planning an addition often worries that the number written on the building permit becomes the new taxable value. This directive says a Kansas county appraiser may not do that: the appraiser "shall not use the value stated on a building permit as the sole criteria for determining the fair market value of real property for property tax purposes."

The reasoning is practical. Because "building permit fees are usually based upon a percentage of the construction costs, the value stated on the building permit is frequently understated; therefore, it is not a reliable cost indicator." And even an accurate cost figure is not the same as market value -- "cost in and of itself cannot be considered 'fair market value,'" and "[t]he market value contributions of additions or alterations to existing properties may or may not be supported by their construction costs." Using the permit figure alone, the Division warns, "would often grossly overstate or understate the value of the property."

What the appraiser must do instead is apply K.S.A. 79-503a, which defines fair market value as "the amount in terms of money that a well informed buyer is justified in paying and a well informed seller is justified in accepting for property in an open and competitive market, assuming that the parties are acting without undue compulsion," and requires consideration of the three generally accepted approaches to value: sales, cost, and income. The directive notes flatly that "[t]he value stated on a building permit is not one of the factors listed in K.S.A. 79-503a."

The directive grounds this in Kansas case law holding that the "essential question is whether the standards prescribed by K.S.A. 79-503a have been considered and applied by the taxing officials," and that an assessment considering "only some of the pertinent statutory factors" cannot be upheld where the evidence shows assessment was not uniform and equal.

Appraisers may still look at permits. The directive is explicit that nothing in it suggests the appraiser "should not have access to and analyze building permits" -- they are "a valuable tool for monitoring vacant lots and other property for new construction and construction in process."

What this means for you

Homeowners doing an addition or remodel

Pulling a permit does not mean your assessment automatically rises by the permit amount. The appraiser has to determine what the improvement actually contributed to your property's market value, using the statutory factors -- and the directive expressly recognizes that an alteration's market-value contribution "may or may not be supported by [its] construction costs." A $40,000 kitchen remodel does not necessarily add $40,000 of market value.

That cuts both ways: because permit values are frequently understated, the true market-value contribution can also exceed the permit figure. The point is that the permit number is evidence, not the answer.

If your valuation notice appears to track your permit amount exactly, this directive is the standard your appraiser is supposed to have met. Raise it at the informal meeting.

Owners of vacant lots and property under construction

Expect permits to be used to find you. The directive cites Directive #98-031: "The county appraiser shall not classify real property as a vacant lot if the county appraiser determines there is added value attributable to the construction in progress on January 1." Construction in progress on January 1 can carry value even if nothing is finished.

Contractors and builders

Clients sometimes ask whether to understate a permit value to reduce future taxes. This directive is a clean answer that it should not work, since the permit figure is not supposed to drive the assessment either way -- and understating a permit value can carry its own legal consequences under local code enforcement.

Accountants and tax professionals

The authority chain is worth keeping: K.S.A. 79-503a supplies the factors; Board of Johnson County Comm'rs v. Greenhaw, 241 Kan. 119, 126-27 (1987) makes considering and applying them the essential question; Sunflower Racing, Inc. v. Board of Wyandotte County Comm'rs, 256 Kan. 426, 442 (1994) adds the "intentionally and grossly disregarded" formulation, citing Northern Natural Gas Co. v. Williams, 208 Kan. 407, 417 (1972); and In re Tax Appeal of Andrews, 18 Kan. App. 2d 311, 317 (1993) ties 79-503a compliance to the uniform-and-equal requirement of art. 11, § 1.

Common questions

Q: Will my property taxes go up by the amount on my building permit?
A: Not automatically, and not by that number alone. The appraiser is directed not to use the permit value as the sole criteria and must apply the K.S.A. 79-503a factors to determine what the work actually contributed to market value.

Q: Why can't the appraiser just use the permit value? It seems objective.
A: Because it usually is not accurate. Permit fees are typically a percentage of construction cost, which gives an incentive to state a low figure, so the directive calls the permit value "frequently understated" and "not a reliable cost indicator." Separately, cost is not the same thing as market value.

Q: Is construction cost ever a good measure of value?
A: For brand-new property it can be among the best. The directive says "[c]onstruction costs plus land costs of a new property may be the most valid indicator of value" -- but immediately adds that cost by itself still cannot be considered fair market value.

Q: Can the county tax my half-finished building?
A: Yes, if it added value as of January 1. The directive quotes Directive #98-031 for the rule that a parcel is not to be classified as a vacant lot where the appraiser determines there is added value attributable to construction in progress on January 1.

Q: Can I cite this directive in my appeal?
A: You can point to it as the Division's standing instruction to county appraisers, and it is a matter of public record. It is not a ruling on your property and creates no taxpayer remedy by itself; your appeal rights come from the appeal statutes. Note also that this is a 1998 document -- check the Division's current directive list.

Citations and references

Kansas statutes and constitution:

• K.S.A. 79-503a (fair market value definition; required factors, including the sales, cost and income approaches)
• K.S.A. 79-501 (appraisal at fair market value)
• K.S.A. 79-1439 (classification)
• K.S.A. 79-5101 et seq. (certain motor vehicles)
• Kan. Const. art. 11, § 1 (uniform and equal); art. 11, § 12 (agricultural use land)

Cases cited in the directive:

• Board of Johnson County Comm'rs v. Greenhaw, 241 Kan. 119, 126-27, 734 P.2d 1125 (1987)
• Sunflower Racing, Inc. v. Board of Wyandotte County Comm'rs, 256 Kan. 426, 442, 885 P.2d 1233 (1994)
• Northern Natural Gas Co. v. Williams, 208 Kan. 407, 417, 493 P.2d 568, cert. denied 406 U.S. 967 (1972)
• In re Tax Appeal of Andrews, 18 Kan. App. 2d 311, 317, 851 P.2d 1027, rev. denied 253 Kan. 859 (1993)

Related directive: quotes Directive #98-031 on construction in progress as of January 1.

Source

• Landing page: Kansas Property Tax Directives
• Original PDF: PVD Directive 98-035

Original ruling text

STATE OF KANSAS DEPARTMENT OF REVENUE
Bill Graves, Governor John D. LaFaver, Secretary

Mark S. Beck, Director
Kansas Department of Revenue (913) 296-2365
915 SW Harrison St. FAX (913) 296-2320
Topeka, KS 66612-1585 Hearing Impaired TTY (913) 296-2366
Internet Address: www.ink.org/public/kdor

                                   Division of Property Valuation


                                        DIRECTIVE #98-035

   TO:                     County Appraisers

   SUBJECT:                Building Permits and Fair Market Value


   A question has arisen as to whether the value stated on a building permit should be considered
   the fair market value of real property for property tax purposes. The county appraiser shall not
   use the value stated on a building permit as the sole criteria for determining the fair market
   value of real property for property tax purposes.

   By law, property other than land devoted to agricultural use, commercial machinery and
   equipment and certain motor vehicles must be valued at fair market value. (K.S.A. 79-501;
   K.S.A. 79-1439; K.S.A. 79-5101 et seq.; Kan. Const., art. 11, § 1; Kan. Const., art. 11, § 12).
   For property tax purposes, “fair market value” means:

                         [T]he amount in terms of money that a well informed
                  buyer is justified in paying and a well informed seller is justified
                  in accepting for property in an open and competitive market,
                  assuming that the parties are acting without undue compulsion.
                  (K.S.A. 79-503a).

   K.S.A. 79-503a also requires a county appraiser to consider several factors when determining
   the fair market value of property for property tax purposes. Among the factors required to be
   considered and applied are the three generally accepted approaches to value: (1) sales; (2) cost;
   and (3) income.

   When determining the validity of an appraisal for property tax purposes, the courts have
   consistently stated:

                          [T]he essential question is whether the standards
                  prescribed by K.S.A. 79-503a have been considered and applied
                  by the taxing officials. The assessment of real property which
                  takes into consideration only some of the pertinent statutory
                  factors of K.S.A. 79-503a cannot be upheld where evidence
                  indicates there has not been a uniform and equal rate of

Page 2

           assessment and taxation in the county. Board of Johnson County
           Comm’rs v. Greenhaw, 241 Kan. 119, 126-27, 734 P.2d 1125
           (1987).

                   See also Sunflower Racing, Inc. v. Board of Wyandotte
           County Comm’rs, 256 Kan. 426, 442, 885 P.2d 1233 (1994)
           (“[T]he essential question is whether the standards prescribed by
           79-503a have been considered and applied by taxing officials, or
           intentionally and grossly disregarded.”), citing Northern Natural
           Gas Co. v. Williams, 208 Kan. 407, 417, 493 P.2d 568, cert.
           denied 406 U.S. 967 (1972).

Thus, the highest court in Kansas has held that compliance with K.S.A. 79-503a is a vital factor
in determining whether a tax assessment is uniform and equal as required by art. 11, § 1 of the
Kansas Constitution. In re Tax Appeal of Andrews, 18 Kan. App. 2d 311, 317, 851 P.2d 1027,
rev. denied 253 Kan. 859 (1993).

The value stated on a building permit is not one of the factors listed in K.S.A. 79-503a.
Because building permit fees are usually based upon a percentage of the construction costs, the
value stated on the building permit is frequently understated; therefore, it is not a reliable cost
indicator. Construction costs plus land costs of a new property may be the most valid indicator
of value; however, cost in and of itself cannot be considered “fair market value.” The market
value contributions of additions or alterations to existing properties may or may not be
supported by their construction costs. Therefore, using the value stated on the building permit
as the fair market value of the property would often grossly overstate or understate the value of
the property.

None of the foregoing is intended to suggest that the county appraiser should not have access to
and analyze building permits. For example, Directive #98-031 provides in part: “The county
appraiser shall not classify real property as a vacant lot if the county appraiser determines there
is added value attributable to the construction in progress on January 1.” Building permits are
a valuable tool for monitoring vacant lots and other property for new construction and
construction in process. However, using the value stated on a building permit as the sole
criteria of fair market value violates the requirement that the county appraiser consider and
apply all of the factors set forth in K.S.A. 79-503a.

Approved: .
Mark S. Beck
Director of Property Valuation