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.

Published: September 28, 2001

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