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.
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.
Homeowners who maintain an escrow account should keep a close watch over the disbursements, because loan servicers sometimes neglect to make the payments on time and then pass along the late fees to the homeowner, according to a bulletin issued by the U.S. Department of Housing and Urban Development. If you notice any overcharges on your escrow account statement, send a letter to the loan servicer to request an explanation.
Property tax calculation varies
Property taxes are “almost always based on the value” of the home, says Bert Waisanen, a program principal for the National Conference of State Legislatures in Denver.
Beyond that, each state or locality typically uses its own peculiar formula to calculate property taxes. These formulae introduce a certain amount of complexity and unpredictability into property taxes.
Property taxes tend not to be volatile, yet they can increase (or decrease) over time. Some authorities only reassess properties when they are sold or improved while others conduct reassessments on a set schedule, such as every year or every three years. Either way, a reassessment can result in a significantly higher tax bill either because the property increased in value or the tax rate was raised — or both.
Residential property taxes are based on:
- Recent assessed value or sales price of the home
- Value of comparable homes in the area
- Improvements that enlarged or added value to the home
- Exemptions for which the home or homeowner qualifies
- Applicable property tax rate set by the taxing authority
Most authorities offer an appeals process that homeowners can tap if they believe their property hasn’t been accurately valued, according to Waisanen.
Sepp says homeowners should “never assume the assessor has correctly accounted for all the features of their property” and “should always at least consider an appeal regardless of (housing) market conditions.”
Help for seniors, poor
Just about every state has some sort of tax relief that may be general or targeted to a specific population of homeowners, according to Waisanen.
Most common forms of relief:
- Homestead exemption
- Credit or rebate
A homestead exemption excludes a portion of a home’s value from the tax assessment if the owner occupies the home as a primary residence. This benefit could be quite small, or could be worth hundreds or even thousands of dollars depending on the amount of the exemption and the way it’s applied. Almost every state has a homestead exemption, though a bit of paperwork might be required to claim it.
A tax cap is a limit that may be applied to the total tax bill, annual percentage tax increase or other aspects of the assessment. Perhaps the best-known instance of a cap is California’s Proposition 13, which limits state property tax rates and annual property tax increases.
A tax credit or rebate occurs when a state or other taxing authority refunds a portion of the property tax to property owners, perhaps through an income tax credit. This type of relief has been on the rise in recent years as higher tax bills have resulted from the run-up in home values, Waisanen says.
A tax deferral allows the homeowner to postpone payment of all or part of the property tax until a later time, such as when the home is sold.
Another form of relief is a so-called “tax swap,” which replaces a portion of property tax revenues with an increase in the state sales tax. The tax swap is “a mini-trend” that a few states, notably Idaho and South Carolina, have implemented and others “are looking at to see whether they can reduce the overall reliance on the property tax,” Waisanen says.
Deferrals are targeted to:
- Low-income households
- Seniors of modest means
Yet Sepp warns that tax swaps don’t necessarily mean lower taxes overall. This distinction is an important point for job-seekers or retirees who wish to relocate across state lines because a lighter property tax could be outweighed by other heavier taxes.
“Hawaii is a prime example,” Sepp says, “Hawaii has by far the lowest property tax burden, but the income tax burden there is horrendous. So overall, you might be paying more in taxes there than you would in New Hampshire, for example, where the situation is exactly the opposite.”
The Tax Foundation, a nonpartisan tax research group in Washington, D.C., has published a county-by-county chart of property taxes on owner-occupied homes based on 2006 U.S. Census Data. Certain counties in New York and New Jersey have the highest median property taxes in the nation, according to this data.
Property taxes are unpopular, Waisanen admits, but they’re also necessary — they account for 70 percent, or more than two-thirds, of local governments’ revenues across the country. Homeowners may feel unfairly targeted by this particular tax burden, but the bottom line is that property taxes, in most places, pay for schools, libraries, fire departments, police officers, street lights and many other public benefits.
Marcie Geffner is a freelance real estate reporter in Los Angeles.