Kootenai County assessor briefs commissioners on valuation rules for Section 42 housing after mediation findings

Kootenai County Assessor Bayla Kovacs and Scott Larson, manager of the assessor’s commercial and specialized division, briefed Board of Equalization commissioners on June 11, 2025, about changes in how the assessor’s office is treating expenses and credits for Section 42 properties following recent mediation and follow-up research. No appeals or formal board decisions were taken at the meeting.

The briefing matters because the assessor’s office says the research affects how Section 42 properties are valued for property tax purposes and could lead to appeals by property owners. The office provided handouts showing how the changes would have altered assessed value for all Section 42 properties in the county had they been applied in the prior year.

Larson told commissioners he contacted the Idaho Tax Commission, IFHA and local CPAs after mediation to clarify four main questions: (1) whether reserves for replacement may be treated as an operating expense (the office’s research says they generally should not), (2) how federal/state tax credits must be amortized, (3) whether property tax expense should be entered separately when the assessor uses the levy rate provided by the state, and (4) which ownership or corporate fees qualify as property operating expenses.

On replacement reserves, Larson said outside advisers and accountants reached the same conclusion: depositing funds into a replacement reserve is a transfer of assets, not an operating expense. “If you take money from your checking account and move it over to your savings account, that’s not an expense,” Larson said, summarizing guidance he received. He said classifying reserve deposits as expenses can produce a valuation reduction that may effectively double-count: the deposit lowers value now, and later a replacement expense may be claimed when funds are spent.

Larson reported reserve deposit sizes he encountered ranged from about $5,000 up to $27,000 per account; he said those deposits were among the largest drivers of differences in assessed value in recent appeals.

On tax credits, Larson said IFHA guidance and a reading of statute “63 2 0 5 a” indicate credits are spread across the term of the regulatory agreement rather than taken as a lump sum. He described the office’s current practice as dividing the total credits by the contract length (for example, by 30 or 40 years) and including the resulting annual amount in assessment paperwork; he said the 10-year payout schedule for some credits does not allow owners to accelerate collection into a single-year lump sum.

Larson also said the assessor’s office follows Idaho Tax Commission practice of using the state-supplied levy rate and state-supplied cap rate in the income-capitalization calculations. When the levy rate is used, the office omits a separate property tax expense from the income statement to avoid double-counting; he noted the state-supplied cap rate in the office’s model dropped from 7.9 last year to 7.0 this year, a factor that contributed to higher assessed values.

On fee classifications, Larson said the office is distinguishing owner- or corporate-level expenses from property-level operating expenses. He said asset-management or ownership-management fees described by some owners are being treated as ownership expenses and excluded from property operating expense calculations, while site-level administration fees that apply to each property remain allowable operating expenses.

Larson summarized observed appraisal impacts: the office’s materials show average assessed-value increases for Section 42 properties “in the twenties” percentage-wise, with some properties increasing as much as 108 percent, and he noted land-value increases and the lower cap rate were major contributors.

No formal action was requested or taken; Larson told commissioners the purpose of the briefing was to prepare them for the likelihood of appeals. He offered to provide follow-up briefings and asked commissioners to contact him after they review the handouts.

Handouts distributed at the meeting include the statutes and more detailed calculations the assessor used to illustrate the differences in assessed values under the clarified treatments.