| Property Taxes |
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There are fewer guarantees in life than the guarantee that we all have to pay taxes. Taxes are collected in many ways and used by federal, state and local government to pay for many different goods and services.
| What is the collected money used for? |
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Taxes are collected on property in a municipality to pay for schools, street cleaning, street lighting, fire protection and various other needed services for that community. The idea is that all who pay the taxes in a municipality will in theory benefit from the payment of those taxes.
| Ad Valorem |
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The municipality attempts to ensure that taxes are fairly and equitably divided. This is based on the value of your property. It is called "ad valorem" (according to value). However, the amount of property taxes you pay is dependent on the municipal budget requirements and not on the assessor's valuation of the property. The municipal budget is drawn up yearly and the money to pay for the various goods and services the budget identifies is paid from the property taxes collected.
| Assessors Role |
The assessor's role is to determine the value of the property but not to determine the amount of the taxes. The more correct name for a tax assessor is a "Real Property Assessor". The assessor determines the fair market value of your property. This can be done in three different ways:
- Market Value. It compares value of property to that of similar or comparable properties. This also looks at the highest price a property would make if it were on the open market. It is important to remember that sale's comparisons are based on arms length samples i.e. the only connection that buyers and sellers have is the home sale. This is in an effort to make the assessment fairly.
- Income. How much would the property cost if it were rented? The assessor includes such things as the current market rental rates, vacancy rates, insurances and maintenance costs associated with the property.
- Cost Approach. This is based on the cost of actually replacing the property minus depreciation. It is the most difficult to compute and thus the least favored method by assessors.
If your assessment does not appear to be fair or you are not satisfied, you may go to the assessor's office to review how the assessment was calculated i.e. market value, income or cost approach. This can often be done informally, however, if you are not satisfied, you can request a judicial review. The assessor's office maintains current information on each piece of property it assesses such as owner, maps and special characteristics. If you think your taxes are too high and you want your voice heard, you will need to make the elected officials in the municipality aware of your concerns and not the assessor.
| Property sale gains and losses, Tax implications and the IRS |
When selling a home a couple can profit up to $500,000 on the sale of the home tax free over a five year period. This is a rolling benefit over a five year period, which means that if you profit $250,000 on the sale of a home you have lived in for 3 years and another $250,000 on a home you've lived in for the next two years, you have maxed out your benefit for that five year period. The property does need to be the principal residence. In order to get the maximum benefit, you need to live in each home for a minimum of two years. However, the amount can be pro-rated if you need to sell your home in less than two years following the purchase. There may be many reasons for this such as a new job requires you to move or relocate.
The amount for a single person is $250,000. Again, if you need to sell and move before the two year period from the sale, the benefit may be prorated e.g. if you need to move after six months, you as and a single person can profit $62,500 where a couple can profit $125,000 tax free.
You only need to report on a gain to the IRS once you have reached the cap over the five-year period. It can be reported on IRS Form 1040 Schedule D. For more information on selling a home and the tax implications see IRS publication 523. Use this link: irs.gov to access IRS information and forms.
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Property taxes are a major expense, one which often totals thousands of dollars per year. But property taxes are not the same for like properties or for every owner.
Property taxes provide much of the revenue used to fund local and state governments. As property values go up, property tax collections also rise which means additional dollars are available for more public services -- and perhaps even for tax refunds. Alternatively, if property values decline, then government programs tend to be squeezed or there is pressure to raise income and sales taxes to make up for short-falls.
How much you pay for property taxes depends on the value of your home and also local tax policies. In the usual case, a property value is established by government assessors. Once a value is set the tax rate is then applied. For instance, if the rate is $1.50 for each $100 in value, then a home worth $100,000 would have an annual tax bill of $1,500 or $125 per month.
The road from the tax assessment to a bill for property taxes is rarely straight, however. There are often complications, so it pays to ask questions:
· What value is used to assess taxes? You might think that a home's current market worth would be used to establish a value for tax purposes, but that's not always the case. In many areas under circuit breaker programs annual tax increases are limited so the tax can be less than current market values might allow. Another approach is to apply the tax rate to a portion of the assessed value and not the full worth of the property.
· What are the current owners paying? Is their tax bill consistent with neighboring homes of equal size and condition? If different, why?
· How will property taxes impact your ability to borrow? Lenders use a number of measures to qualify borrowers and one of the most important is the percent of gross monthly income spent for mortgage principal, interest, property taxes, and insurance -- what loan officers call PITI. Low property tax bills can make it easier to qualify for a loan.
· Has the tax bill been appealed or is it being appealed? Values by tax assessors can be contested if owners think estimates are too high -- perhaps because the valuation did not consider certain factors, the math was wrong, or an incorrect schedule was applied. Local assessment offices can tell you how to appeal and in many areas there are services which will do the fighting for you.
· Are you or the current owners entitled to an exemption? Local rules vary extensively, but those over 65, veterans, individuals with limited incomes, and others may be entitled to a full or partial exemption. If, for example, the current owner has an exemption which will not apply to you, then current tax costs may be effectively understated.
· Can property taxes be deferred? To ease cashflow burdens for retirees, it may be possible to have property taxes accrue as a lien against a home. Owners in such situations need not pay some or all of their property taxes: instead, when the home is sold, taxes are taken from the sale proceeds. One jurisdiction, Montgomery County, MD, actually allows qualified owners of all ages to defer property tax payments under this system.
· What are the income tax benefits of property tax payments? In the usual case, property taxes are deductible from federal and state income taxes. For details, speak with a tax professional.
· Will the sale of a property trigger a different tax bill? A sale may suggest a new and higher value to assessors, past exemptions may not apply, and circuit breakers may be re-started or even turned off.
· How often are assessments made? In some areas physical assessments are only made every two or three years. This means that property taxes may be based on values which are out of date, something that can be important in communities where property values are rapidly changing, either up or down.
If all of this seems fairly complex, it is. The local tax assessment office can tell you how the system works while real estate brokers can provide general information. In the end, of course, there are always taxes to pay, the only question is how much.
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