Demystifying Local Property Taxes

It’s crucial for homeowners and investors to understand how property taxes work. Here’s what you need to know.

Benjamin Franklin is famously quoted as saying “in this world nothing can be said to be certain, except death and taxes.”

The question isn’t whether or not you’ll be paying property taxes. A better question is “how much do I owe?” Property taxes are crucial for homeowners because it’s a significant amount of money that comes out of their pocket every year. Depending on the value of your property, it could be thousands or even tens of thousands of dollars.

To many, property tax calculations are a complete mystery. However, you should know that there are overlooked aspects of property taxes that give homeowners more control over tax value. When it comes to property taxes here’s what everyone should know about your local taxes, increases, and methods for making an appeal.

Know your local taxes

State and local governments collect taxes as revenue to fund roads, education, police, and other services. In most cases, you’ll pay one combined tax bill for your property. Each homeowner is required to pay taxes based on the value of their house, along with a variable rate depending on location.

Generally, your property tax is split into a semi-annual payment. If you’re unsure about your tax situation, you can contact your title company for more information. “You definitely want to call the title company and understand what that tax payment will be,” said Polina Ryshakov, Senior Director of Research and Lead Economist at Sundae.

Additionally, The Taxpayer Advocate Service is an IRS resource available in your state. This service ensures every tax payer is treated fairly and helps with appeals.

Understanding tax increases

Property taxes are the largest source of revenue for local governments in 40 states. Increases are going to happen which isn’t always a bad thing. It could mean that the overall value of your local area is increasing too. Most tax assessments will already be less than your true market value to begin with (usually 20 percent less than what it should be). For example, if you can put your home on the market for $200,000, the assessment will probably treat your home like a $160,000 property.

How to appeal your property tax bill

Your local tax increases are a normal concept, but understanding increases means that you may know if a recent hike is out of line or not. If you suspect that your property tax increases are too much, you may have the grounds for an appeal. After you review your assessment, the property owner has 90 days in most cases to file one.

Look up your local tax rate and payment schedule first and make sure it lines up with your assessment. Afterwards, go online and check your official record card for your property. Here, you will see a detailed description of your property including the number of rooms, size, etc. Confirm that all of the details are correct because that same description was used to assess your home.

Finally, build your evidence so you can make your case to your city hall. Make note of anything unappealing in your home such as structural damage or a drainage issue. Let them know if your home has a problem, possibly bringing down the true value. As you make your case, it’s most important to compare how other homes are valued in your neighborhood. If your property is valued higher than most, you need to know why you were taxed that high. There are several methods used for comparing properties.

Sales comparison method

The sales comparison method is embedded into the real estate market. The value of your home is equal to comparable homes (comps) more or less with adjustments. It’s an effective method when there’s a large sample size. In other words, when lots of homes are selling in your neighborhood, the better the sales comparison method works.

Overall, your home value is a sum value of features including with the home. The challenge with the sales comparison method is when the market is cold. Less sales transactions hinders this method because there are less comparisons to make.

Replacement method

In the replacement method, the purchase cost of land along with improvement cost minus accumulated depreciation makes up the value. It’s also known as the cost approach to real estate valuation. In simpler terms, the replacement method is calculated by what it would cost to replace the property if it was destroyed. The logic is that the property needs to have a future value worth more than the original purchase price plus all of the necessary building costs in order to buy to begin with.

Income method

With the income method, a property’s value now, is the present value of the future cash flows that you expect as a real estate investor. The income method is most effective with income-generating properties because rental income represents future cash flow.

This approach also uses elements of the sales comparison method. Other rental properties are compared based on their expected appreciation (capitalization rate). For example, as rent prices increase in the neighborhood, then the property appreciates.

Understanding property taxes

It’s important to know how your taxes benefit your local area and how taxes could be raised. You can’t control mill rate increases, but you can make an appeal using a couple different methods. Making the calculation of your property taxes ensures that you always pay the true value even if a mistake is ever made.