mortgage

Property taxes trip up naive homebuyers

Longtime homeowners may be willing to accept property taxes as an unavoidable fact of life, but homeownership newbies could be surprised or even shocked to discover just how costly these annual government assessments can be.

Homebuyers need to plan ahead for property taxes, which can easily amount to thousands of dollars each year. Yet it's not always easy to figure out how much to budget for this expense.

Tax traps for new homeowners

Homebuyers are well-advised to research property taxes before they make an offer to purchase a home, so they won't be caught off-guard by rate hikes or reassessments, for example.

Tax traps include unanticipated reassessments or rate hikes, supplemental bills in the first year of ownership, and significantly higher taxes in the second and subsequent years of ownership. Homebuyers should contact the local assessor's office -- many of them have Web sites -- to research their properties.

What to know about property tax
  • How property tax is calculated.
  • Whether the home will be reassessed upon sale.
  • When the next scheduled reassessment will occur.
  • If any exemptions apply.
  • If tax relief is available.

A real estate broker's estimate of the tax or a copy of the current owner's tax bill may be helpful, but those sources might not reflect a scheduled post-sale reassessment that could result in a substantially higher tax.

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Buyers also should find out whether a home may be subject to multiple property tax authorities. Not only states, but also counties, cities and special districts, such as local water, sewer or school authorities, may wield such powers, according to Pete Sepp, vice president for policy and communications at the National Taxpayers Union, or NTU, a nonprofit group in Alexandria, Va. The trend in the past decade has been to create new kinds of taxing districts that circumvent limits on state property taxes, he says.

Remodeling a home sometimes can trigger a reassessment. Homeowners who add another bathroom, install a central heating, ventilation and air-conditioning system, or otherwise significantly improve their home can be subject to higher property taxes every year thereafter as a direct result of such improvements.

Escrow accounts ease the pain

Homeowners are so often ill-prepared for the burden of property taxes that many lenders and loan products require an escrow account to set aside funds for these expenditures. The lender or loan servicer estimates the amounts due; the borrower pays 1/12 of the estimate each month, and the set-aside sums are then used to pay the property taxes, insurance and sometimes other costs as well.

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