Pondering Property Tax
Home price is one thing, annual assessments are another. Don't let the hidden costs in home ownership surprise you each year
By Charles Scutt CTW Features

Shopping for a home can be a taxing process - especially for those who don't probe deeply enough to learn how much they'll owe in property taxes once they purchase.

Often misunderstood, taxes assessed on property valuations can vary widely throughout the country, depending on municipality, size and condition of the home and other factors. Experts say that many homebuyers - particularly first-time purchasers - often are unprepared for the big chunk that property taxes comprise in closing costs and the tax ramifications that will continue throughout a homeowner's life.

"It's important that buyers learn about property taxes on the residence they are thinking about purchasing because the taxes could be the factor that make the difference between being able to afford the house and the house being beyond the buyer's means," says Linda M. Toga, an attorney in East Setauket, N.Y.

For example, at closing the buyer often is required to reimburse the seller for prepaid property taxes and to give the lender a portion of the taxes that will come due after the closing, she says.

"It's not at all unusual for the buyer to pay thousands of dollars in property taxes at the closing," says Toga. "And the portion of the annual tax bill that is often included as part of the monthly payment demanded by the lender may put a house beyond a buyer's reach."

According to Ted Lanzaro, managing partner at Lanzaro CPA, Shelton, Conn., property taxes are commonly assessed based on three factors: the assessed value of the home as determined by the local government tax appraiser; the budget of the local government; and a mill rate - a dollar amount assessed in tax for every $1,000 of assessed value, which is determined by dividing the total budget amount over the total assessed value amount of a town. For instance, a mill rate of $20 on a home with a $250,000 assessed value would equal $5,000, says Lanzaro.

"Property taxes are assessed every year based upon the budget of the local government," he says. "Depending on the growth of value in the housing market of an area, the assessed value of a home may be reassessed every year or every few years in slower growth areas."

Toga says that some municipalities assess properties based on a number of factors, including but not limited to the location of the property, the size of the lot, how the property is zoned and whether or not it is improved.

"It's not unusual for a homeowner's taxes to increase following the renovation of a kitchen or the addition of a bathroom," says Toga.

Toga says it's important to realize that homeowners in towns with large shopping centers, several industrial parks or other tax-generating business sources generally have lower real estate taxes than owners with comparable properties in primarily residential areas.

Likewise, owners residing in a municipality that needs expanded services and facilities, such as a new high school, may have higher taxes than a neighboring town that had a high school built 10 years ago, Lanzaro says.

If you're considering the purchase of a new-construction home, be prepared for other complications that may arise a year or two after the purchase, says Ron Cahalan, a Gilbert, Ariz.-based mortgage lending analyst

"In most counties, the property taxes for a new home are still being assessed at the preconstruction value of the lot, so the property taxes are still very low," says Cahalan, who adds that it can take a county up to four years to reassess a newly built property. "That's when the homeowner is blindsided by a tax assessment and tax bill that may be five or 10 times the amount it was when only the lot was assessed."

While many homeowners gripe about the steep financial responsibilities of paying for property taxes, keep in mind that these funds are essential to the healthy functioning of local governments, Lanzaro says.

"Money collected from property taxes goes to pay for the services provided such as schools, police and fire departments, sanitation, recreation and other services," says Lanzaro.

Any large increase in assessed value of your home should serve as a red flag to prompt you to challenge the assessment, Lanzaro says. In this case, "research what comparable homes in your area were assessed at to see if a marked difference was apparent," he says.

If you have not made major improvements to your property and there has not been a town-wide reassessment, you may want to dispute it, Toga says. Owners who believe their assessment is incorrect generally have a limited time each year during which they can dispute the figures.

Lanzaro says that some states and local areas have laws that cap the amount that a property can be reassessed for. Case in point: Florida has a homestead law that caps reassessment of the value of primary residences to 3 percent a year.

Property taxes and assessments will continue to be big topics with all the ups and downs of the real estate market in the coming years, Cahalan says, especially in volatile markets like Arizona, Las Vegas, California and Florida.

"We could see an even greater drop in values as the inventory of homes on the market rises and demand lessens," he says. "It will be interesting to watch."