How To Make Sure Your Yeal Estate Taxes Are Justified
What is real estate tax and why do we pay it?
Property tax, or real estate tax is a tax paid by property owners to the local government in a given area. If an individual owns a house, commercial property, or land to any degree, property taxes must be paid on these unmovable possesions. Property taxes are used to fund schools, police and fire departments, road repair, public infrastructure projects, and other services such as water and sewer that all benefit a local community.
Property tax is a regressive tax meaning the tax bill is determined by the value of the asset. The tax is determined by what the taxpayer owns or purchases and is not dependent on the individual’s income level. With income tax, higher earners pay more at each income tier using a progressive tax structure.
How property tax is calculated
Property tax is calculated by determining the value of the property and multiplying it by the town or city tax rate. The property’s value consists of the structure or structures value, along with the value of the land that it sits on. As you would imagine, properties that are larger and recently updated will have a higher tax bill than smaller homes that are in need of repairs and updates. Owners of larger lots pay more tax than those with smaller lots. Many other factors can go into determining the
Now you may be asking, who determines how nice or how large the property is? Is the sale price of the home or the Zillow estimate used to calculate the property’s real value? Well, it is the assessing department that determines a property’s taxable value. The assessor values the property by looking at various metrics. Some of the criteria that go into the calculation are lot size, interior finished space size, bedroom count, bathroom count, condition of key spaces such as bathroom and kitchen, and overall condition. The property may be analyzed alongside comparable properties in the area which can help determine its assessed value.
The assessed value is adjusted every fiscal year in the municipality database. Sometimes, these adjustments are made with assumptions about the area such as average appreciation estimates for that specific town or county. As the homes appreciate in value year after year, the assessed value will tend to increase.
When a property is sold, there is a transfer of ownership and the assessed value will most likely be reflective of the new sale price. If it’s been a while since the property was last sold, there is a chance the home value was lagging and the previous owner was paying less in taxes than others were with a similar property. This isn’t always the case but it can occur if it’s been many years since an assessor has seen the property inside and out. On the other hand, sometimes the assessor makes estimates about the property without getting their eyes on it and it can be overvalued.
What impacts property tax rate?
The tax rate is typically expressed as an amount of dollars per $1,000 of property value. This means that if a residential tax rate is $13.28 and the home’s assessed value is $350,000, the yearly real estate tax bill would be 350 times $13.28 or $4,648 per year. We don’t want to assume that A class and B class neighborhoods in more expensive cities and towns have a higher tax rate. In fact, these towns tend to have lower tax rates but a higher tax revenue per household. This is because the assessed values of the homes are much higher when compared with those in C or D class neighborhoods. There is somewhat of a balance to achieve because in some areas, it wouldn’t make sense to live in one town when one could live a town over and pay $10k less in property tax given the two homes were exactly the same.
The tax rate may be influenced by a few things and vary over time. If a city is planning to build new schools, parks, and infrastructure in the near term, taxes may be increased. If more housing is built in the city which allows for many more residents, the tax rate may decrease since more households are contributing through taxes.
How to check if your tax bill is appropriate
If you plan on making an offer on a property, it’s important to get familiar with the property tax costs. Check the assessors online database for the town the property is located in and look up the parcel to see what the tax amount is for the given year. Review the assessed value and observe whether this value seems roughly correct. If it appears to be lower than expected, perform a rough calculation on the offer amount with the city tax rate to determine how much tax you would need to pay. This can help you avoid the surprise of a hefty tax bill.
Let’s say you already own your house and for the sake of this example, you paid $600k for the home. The real estate tax bill comes back with an assessed value of $690k. There is a chance that the assessed value is too high as the property may not actually be worth $690k. This may happen when blanket appreciation rates are assigned to all properties in that area when the city is determining the latest tax bills. When this happens, it may be possible to get the property tax adjusted down. The property would need to be reassessed with all the latest data from comparable houses, the current condition, and land / structure values.
It is always a good idea to analyze comps or comparable properties in the area where your property is located. You can typically find out what the tax assessed values are in the online database. Properties in the same neighborhood with a similar number of square footage, bathrooms, and bedrooms make good properties for comparison. For the most accurate data, look for properties that were sold in the last one to two years.
Requesting adjustments to your tax bill
After reviewing all the data and you feel the assessment is overvaluing the property, you should be able to file an abatement form. When an abatement is filed, the assessor would like to know why you are requesting an adjustment so it is important to send valid reasoning and examples. The assessor will typically reach out to the property owner if the request appears legitimate. Assessors will happily come out and take a look at the property to analyze its condition and comparables with a more comprehensive approach. Keep in mind that the assessor will want to see the inside and outside of the home. Once all of this is completed, there is a possibility the assessed value is reduced which in turn results in a reduction in property tax.
It can be worth checking this out as you may be able to save $50 to $100 per month. Why pay more taxes than you need to?
