Beginner’s Guide to Property Tax
As Benjamin Franklin once pointed out, there are only two certainties in this world, and they are death and taxes. That hasn't changed, and today there are many different taxes to be aware of. Property tax is one of the most common, yet the most misunderstood of all the taxes. So to help new homeowners here is our beginner’s guide to property taxes:
1. The property tax is necessary
Taxes are a necessary evil. The property tax, in this case, is necessary because it is a source of revenue for the state. Revenue generated by property taxes are used by local governments to:
• Fund the public school system, the local police department, and the fire department
• Maintain streets
• Fund garbage collection and disposal services
2. How is the property tax computed?
Before the property tax is computed, its fair market value will first be assessed by a local assessor. Then the property tax is computed using this formula: assessed property value x the mill rate. The Balance defines the mill rate as “the amount of tax payable per dollar of the assessed value of a property.”
Assume, for example, that you own a townhouse and that the local mill rate is 45 (which equates to 4.5%). Your property tax will therefore be $45,000 ($1 million x 0.045). The lower the mill rate, the lower your property tax. Given the same valuation, but with a mill rate of 25 (2.5%), your property tax will go down to $25,000.
In the computation of the property tax, therefore, it is important to bear in mind two things. The first one is that the value of your property will be determined by a tax assessor. Just because you bought that townhouse for $750,000 doesn’t mean its assessed value will be $750,000, too. It can be higher or lower, with the assessor using any of the following assessment methods:
• Sales comparison in which the assessor will compare your property to similar ones sold in the vicinity where your property is situated. Adjustments will then be made as to what makes your property more or less valuable compared to the others.
• The cost method in which the assessor computes how much it will take to build your property from scratch.
• The income method in which the assessor estimates how much income you can generate should you decide to rent it out. This assessment option is usually used for commercial and business properties, and it takes into account costs of maintenance, rental rates at the time of the assessment, and insurance expenses.
The second thing to consider is . . .
3. Mill rates
Mill rates vary from state to state, and even city to city or town to town. The mill rate in Illinois, for instance, is different from that in California. In-state, meanwhile, the mill rates for the five New York boroughs, for example, are different from one another. Additionally, mill rates are actually fluid. This means it can change from year to year as it is determined by the budget deficit of a particular year. To illustrate, suppose you own a property in New Hampshire town. The local government will pass a budget for next year and then subtract from it all known revenues. The deficit will then be raised via property taxes, with the mill rate central to the computation. In short, the higher the deficit, the higher the mill rate will likely be. But to give you a clearer idea, the mill rate is arrived at by dividing the deficit by the value of all properties in the town and then multiplying the quotation by 1,000.
There are workarounds for lower taxes
Property taxes can be a burden, but fortunately there are workarounds to lower your property tax. Some of these tricks include requesting for your property tax card and reviewing it for errors and discrepancies. Assessment mistakes are commonplace, so you might as well do some checks. You might also want to hold off on building permanent fixtures like a pool, a patio, or a large shed as each is perceived to add value to your home, at least in the eyes of the assessor.
There are also more “formal,” law-mandated workarounds that can be taken advantage of by property owners. A tax abatement is simply a reduction of a building’s property taxes on account of various factors. An example of it is the 421-a tax abatement in New York. The NYC tax abatements feature on Yoreevo explains how the “421-a” program was designed for affordable housing. Under this program, apartment owners will get a considerable property tax reduction for X amount of years if they agree on offering a certain number of affordable units. Tax abatements, though are not exclusive to New York. The state of California, for example, has them, too. ‘Property Tax Abatement Programs’ by SFGATE lists some of the state’s tax reduction options, including homesteads, where X amount of the assessed property value is subtracted from the property tax of owner-occupied homes. Elderly homeowners also get some form of property tax relief, with reductions based on their age and income. Here in Seattle, there is the so-called multifamily tax exemption (MTE), which is very similar to New York’s 421-a program in that its aim is to give families affordable living spaces. Under the MTE, owners of multifamily buildings can gain property tax reductions if they set aside 20–25% of their units as income- or rent-restricted, thereby assuring affordable homes for families.
Whether you like it or not, property taxes are here to stay, and might be even more of a financial burden given the tax reforms passed for 2018. Notably, property deductions are now capped at $10,000 as opposed to unlimited deductions in the past years. And based on early returns, the changes in property taxes in Seattle have led to skyrocketing tax bills. Homeowners are, sadly, feeling the crunch, with property taxes increasing by over 42% since 2014. Given this sad reality, it is best that all property owners find out all they can about property taxes.