Thinking about taking advantage of the housing slump by scooping up a house whose price has declined 30 or 40 percent? Well, in Latin the phrase is, Caveat emptor, or 'Let the buyer beware,' and that advice applies more than ever in today's housing market. When it comes to houses, you'd better do your homework, because in most cases, while prices are down, property taxes have not dropped anywhere near as much.
Real estate and accounting professionals agree that in addition to property taxes, potential home buyers and speculative investors should evaluate the numerous taxes and other factors affecting the cost of living in an area, outside of the home purchase price and the payment needed to service the mortgage and property taxes. And chief among these are: municipal user fees and special district taxes, and other taxes levied in the area, such as income taxes and sales taxes.
Lower home prices: No guarantee of lower taxes
Perhaps the biggest pratfall to avoid is to succumb to the myth that 'If a home's price has dropped 30-35 percent, then annual property taxes for that home automatically have declined 30-35 percent.'
Wrong. In most counties, towns and states, property taxes are based on a home's assessed value. Many jurisdictions re-appraise homes within five years, but some states, such as Connecticut, permit towns to delay re-assessment for as long as 10 years. This frequently leads to a lag or gap between property taxes paid, and what the property tax bill would be for the home, based on current market value.
For example, in Colorado, home prices have dropped substantially in the past year, but whether or not home owners will see a substantially drop in taxes, will depend on, among other factors, whether the county re-appraises its homes in that year. In Colorado's San Miguel County, the county assessor's office re-appraises property every two years, telluridenews.com reported. Hence, while real estate prices have dropped recently, the 2009 tax assessment won't include most of the year's sales in this year's budget formation.
Art Goodtimes, a San Miguel County Commissioner, said he sympathized with property owners.
"Even though their [home] prices are lower now, their valuation is going to stay about the same," Goodtimes said, telluridenews.com reported. "Unfortunately, [the valuation period] was just sort of the beginning of the downturn. People are not going to see much relief in their taxes."
As a result, a previously $450,000 3-bedroom, 2-bath house in Telluride, Colorado with an April 2009 market value of $350,000 will not see a reduction in property taxes this year.
Connecticut: Steady habits . . . and property taxes
In Connecticut, the property tax circumstance is similar, although somewhat nuanced. The primary government unit at the local level in the state is the town or city, not the county, and all localities re-appraise property for their respective grand lists within the state-required 10-year maximum. New Britain, Connecticut is a representative town: it's last revaluation for property was completed in 2007 and the next appraisal is slated for 2012.
As a result, New Britain's home owners, like their brethren in Colorado, are in an unfortunate circumstance: the last appraisal incorporated home values just as home prices were starting to top in 2007. Home prices in New Britain have since dropped 10-25 percent, but there will be no corresponding cut in property taxes, because the city's grand list will use the 2007 revaluation as its base.
David Bettencourt of Berlin, Connecticut told DailyFinance he's one homeowner not expecting a property tax decrease. The second home he purchased, a three-bedroom home in nearby New Britain, Connecticut, had an assessed value of $325,000 in 2007. It's market value "is now roughly $250,000-$260,000," he said, based on recent, comparable sales in that New Britain neighborhood. However, his tax bill is based on the 2007 appraised value, not on the home's current market value, hence his tax bill in 2009 will not be lower.
"As far as the City of New Britain is concerned, my home is still worth $325,000," Bettencourt said. "I tell the city, if you can find the amount over $260,000, I'll split it with you."
Useful property tax metrics
Further, just as lower home prices in 2009 are no guarantee of a lower property bill in 2009, a low property tax, in and of itself, doesn't necessarily mean your overall taxes paid at the local level will be lower. Counties and states, levy sales taxes, income taxes, school district taxes, special use / district taxes, water fees, sewer fees, and garbage collection fees, among other taxes. Then, of course there is the capital of the world, the City of New York, which levies a city income tax. Realtors and accountants generally agree that prospective home buyers / property purchasers should obtain information on all taxes levied in a city, county, and state to determine which locale has the overall lower tax burden. Basing a home purchase on property taxes alone could give you an inaccurate picture of your total tax burden in a jurisdiction and end up costing you a great deal of money.
Another problem concerns comparability, due to vastly differing costs of living by U.S. region. With the aforementioned in mind, the non-profit Tax Foundation has useful data: it ranks states by property taxes as a percent of median home prices and as a percent of median income.
These metrics tell the potential home buyer 'What percent of my home value will be taxed?' and 'What percent of my annual income will I pay in property taxes?' These are considered more-meaningful indicators of property tax costs, given the wide regional disparities in both median home prices and incomes in the United States, as they create standardized metrics that enable state-to-state comparisons.
Another pratfall to avoid: Potential homeowners should also request a property's tax payment record – it's a public record that may be viewed by anyone – from the county / city / town clerk, including a report on liens, if it's not attached to the file. (Many public offices charge a small copy fee to replicate the report.) The reason to review the property tax payment record? In some states, the buyer of the property is responsible for any unpaid tax bill. In the state of New York, for example, if you buy a home that has an unpaid property tax bill, school district fee, or garbage collection fee, water fee etc., that bill becomes your responsibility after the closing.
Can you fight city hall?
Finally, a word on appealing property appraisals, and the accompanying property tax assessments. Homeowners, including those who've just purchased a home, can appeal the appraisal and assessment, but the laws and processes vary by state / county / city / jurisdiction. In some counties and states, home owners must file an appeal at a county / city board of assessors office, which then assigns a hearing. In other jurisdictions, particularly smaller ones, the process is less-formal, where the homeowner presents evidence of why his / her assessment should be lowered, to an individual assessor. (The usual reason cited by home owners is a substantial decline in the home's value, due to market conditions.)
Thousands of home owners in Miami-Dade County, Florida, which has seen home prices collapse in the past year, have applied to do just that: they've applied for a review by the Miami-Dade County Adjustment Board, in order to lower their property tax bills, miamiherald.com reported Saturday. The adjustment board has the power to overrule the local property appraiser. More than 70,000 Miami-Dade home owners have applied for appeals this year, compared to 51,571 for the same period a year ago.
Further, as common sense suggests, if you believe the home's value has dropped substantially and the lower property tax would amount to thousands of dollars less, it may be beneficial to request an attorney's assistance to help you make your case before property tax officials.
Housing Analysis: As they say, forewarned is forearmed: a drop in a home's value does not guarantee a lower property tax bill. And: A low property tax bill doesn't guarantee that you'll pay less in taxes overall in that region – the region may have a high income or sales tax, or other levies.
Further, potential home buyers should also remember that, if what's important to you is not solely a low tax bill, a low property tax rate is not nirvana. Localities in Mississippi have very low property taxes; localities in the states of New York and California, high property taxes. This does not mean that Mississippi's municipal and social services are better than New York's and California's, nor does it mean that Mississippi offers a better quality-of-life. The latter depends on what one wants from a community socially, culturally, and recreationally, among other factors.
Financial Editor Joseph Lazzaro is based in New York.
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