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The Property Tax Trap Hiding in Your Real Estate Underwriting
Underwriting should separate current real estate property taxes from stabilized taxes and account for local reassessment rules
September 2, 2026 by Jesse Brewer
When most investors begin underwriting a real estate acquisition, they start with the numbers provided by the seller or broker. Rents. Utilities. Insurance. Repairs and maintenance. Property taxes. Most of those numbers provide a useful starting point.
Property taxes can be different.
One of the easiest mistakes to make when underwriting an investment property is simply taking the current property tax bill, plugging it into your pro forma and assuming that expense will continue after you buy the property.
It may not.
And on a larger deal, getting that one line wrong can materially change both your cash flow and what the property is actually worth.
The seller’s taxes aren’t necessarily your taxes
Consider a simple example.
Assume an apartment property was purchased 10 years ago and currently has a tax assessment of $1 million. For simplicity, assume the combined effective property tax rate is 2%. The current owner is paying approximately $20,000 per year in property taxes.
Now assume that during those 10 years, rents increased, the property’s net operating income improved and multifamily values appreciated substantially. Today, the property is worth $3 million.
You purchase it for $3 million.
If the property is reassessed near its new market value, that $20,000 tax bill could eventually become approximately $60,000. That’s a $40,000 increase in annual operating expenses.
For an investor, however, the damage isn’t limited to losing $40,000 of annual cash flow.
Real estate is generally valued based upon its net operating income, or NOI. If expenses increase by $40,000 while everything else remains equal, NOI falls by $40,000. At a 7% capitalization rate, that $40,000 reduction in NOI translates into approximately $571,000 of value.
Think about that for a moment.
A line item that looked like a $20,000 expense in the broker’s offering memorandum could ultimately create a $40,000 annual cash-flow shortfall and more than a half-million-dollar difference in your valuation.
That’s not a rounding error.
Underwrite the property you’re buying, not the property the seller owns
This is where I think investors sometimes approach underwriting backward.
Historical financial statements tell you how the property performed for the seller. Your job is to determine how it will perform for you. There is an important difference.
In Kentucky and Ohio, where I do most of my business, I assume that when I buy a property for substantially more than its current assessed value, the higher market value is eventually going to work its way into the property tax assessment. The exact timing and mechanics differ by state and jurisdiction, but I don’t underwrite a deal assuming that I am going to continue benefiting indefinitely from the seller’s old assessment.
Kentucky, for example, assesses real property at estimated fair cash value, and the state notes that when property was purchased in the preceding year, the deed value may be considered for the following January 1 assessment. Ohio also values real property based on true or market value, and state law allows an arm’s-length sale price to be considered when determining that value.
Interestingly, the opposite isn’t something I automatically count on.
If I buy a property for substantially less than its assessed value, I don’t simply assume the taxing authority is going to lower my assessment and send me a smaller bill. I underwrite based on the existing assessment unless I have a sound basis for a lower value, and then I pursue the applicable review or appeal process. I’ve heard similar experiences from investors operating in other states, although property tax laws and reassessment procedures vary significantly by jurisdiction.
That’s why the current property tax bill is useful information, but it shouldn’t necessarily be the number you put into your stabilized underwriting.
The better question isn’t: What are the property taxes today? It’s: What are the property taxes likely to be once I own the property?
Don’t stop at the purchase price
Once you recognize the possibility of a higher assessment, there is another mistake you can make. You can simply multiply your purchase price by the current tax rate and assume you’ve solved the problem. That’s certainly better than blindly using the seller’s tax bill, but I would still dig deeper.
Property tax systems are local. Assessment practices, effective tax rates, exemptions, appeal procedures and the timing of valuation changes can vary significantly from one jurisdiction to another.
Call the assessor’s office. Look at recently sold comparable properties. See what happened to their assessments after they changed hands. Talk with a property tax professional if the potential exposure is large enough.
You are trying to answer a simple question: What am I reasonably likely to pay in property taxes once I own this property?
That’s the number that belongs in your stabilized underwriting. If there is uncertainty, I would rather underwrite conservatively and discover later that my taxes are lower than expected than build an acquisition around an artificially low expense number.
Margin of safety matters.
The timing matters, too
A higher assessment doesn’t necessarily show up on the tax bill the day after closing.
Depending upon the jurisdiction and its assessment cycle, there may be a delay before a new value works its way through the system and ultimately appears on your tax bill. That can create an interesting trap.
Your first year of ownership may look exactly like your underwriting predicted. Cash flow is strong. Distributions are being made. Everything appears to be working. Then the new assessment arrives. Suddenly the property’s expenses increase substantially.
This is why I think investors should distinguish between the current tax expense and the stabilized tax expense when evaluating an acquisition.
If the higher taxes aren’t expected until year two, model that. But don’t pretend they aren’t coming simply because they aren’t due in year one.
Could buying the entity make a difference?
On larger transactions, there may be another question worth exploring.
Instead of purchasing the real estate directly, could the buyer purchase the entity that owns the real estate?
Depending upon the state, the ownership structure and how the transaction is structured, an entity purchase may be treated differently from a direct sale of the real estate for property tax purposes.
This isn’t something I would assume works. It’s something I would investigate.
Some jurisdictions have change-of-control or change-of-ownership rules that can trigger reassessment even when the deed itself never changes hands. So an entity purchase should never be treated as an automatic way around a reassessment.
There are also considerations beyond property taxes. When you purchase an entity rather than simply buying its real estate, you may also be acquiring the entity’s history, contracts, obligations and potential liabilities. That’s where experienced legal and tax counsel need to be involved.
But on a large enough transaction, the potential savings can justify asking the question.
Go back to our example.
The difference between the existing tax bill and the projected tax bill is $40,000 annually. Capitalized at 7%, that’s more than $570,000 of value. On a $3 million transaction, that is significant. On a $30 million or $100 million transaction, the numbers can become enormous.
That doesn’t mean an entity purchase is the right answer. It may not be available, practical or beneficial at all. But sophisticated underwriting isn’t just about identifying an expense. Sometimes it’s also about asking whether there is a legitimate way to structure the transaction differently.
Don’t let the offering memorandum do your underwriting
Brokers aren’t necessarily doing anything wrong when they show you the property’s current tax expense. That’s what the property is paying today.
But an offering memorandum is designed to tell you about the property as it currently exists. It isn’t a substitute for determining what your expenses will look like after you acquire it.
That distinction matters.
If you’re considering purchasing a property for substantially more than its current assessed value, don’t simply ask what the property taxes are today.
Find out how the jurisdiction values property after a sale. Estimate the taxes based on the value you reasonably expect after the acquisition. Understand when that new assessment is likely to hit. Then put that number into your underwriting.
Because ultimately, you aren’t buying the seller’s historical cash flow. You’re buying your future cash flow.
Jesse Brewer is a local county commissioner in Boone County, Kentucky, real estate broker, investor, property manager and private money lender.This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: zeb@hwmedia.com.
Source notes
Kentucky Department of Revenue: real property is assessed at estimated fair cash value; the deed value of property purchased in the preceding year may be considered for the following January 1 assessment.
Ohio Revised Code 5713.03: county auditors determine true value; an arm’s-length sale price may be considered in determining value.
Ohio Administrative Code 5703-25-06: counties reappraise on a six-year cycle with an update in the third year; sales and income information are among the valuation inputs.
