One of the "joys" of homeownership is paying property taxes. While we all want our roads plowed and our children educated, no one wants to pay more in taxes than necessary, especially if our neighbors are paying less for a house that's quite similar or even better.
The median amount that U.S. homeowners paid in property taxes in 2006 was $1,742, but some folks were hit with much larger bills. For example, according to the non-profit, non-partisan Tax Foundation, homeowners in Hunterdon County, New Jersey paid the most. The median tax bite there was $7,999. Have a bigger than average house on a large piece of property in Hunterdon? Then all I can say is "Ouch!"
Wherever you live, you may be surprised to learn that the amount you have to pay is more under your control than you may have thought. Municipalities all have procedures for "grieving" property taxes, where - if you make a strong case - you can get your taxes lowered, not just for a year, but for years to come.
How Property Taxes Are Calculated
Before you can build a case, you need to understand how the tax collectors arrive at the amount you have to pay. While the details vary, the taxes that homeowners pay are based upon these four components:
1. The property's appraised value: What the local assessor determines the property is worth compared to other properties in the area. Also known as the property's assessment, it might be based upon your home's current market value or on a community-wide reassessment that took place in the last few years.
2. The assessment ratio: For example, in Tennessee, taxes on homes and farms are based on 25% of their appraised value, while in other states, the ratio can vary from county to county.
3. The assessed value, which is determined by multiplying the property's appraised value by the assessment ratio. Staying with Tennessee, if a home is worth $200,000, its assessed value would be $50,000 ($200,000 times .25). But in many parts of the country, real estate is assessed at "full valuation," that is, at 100% of the property's assessment. In these communities, the $200,000 house would have an assessed value of $200,000.
4. The tax rate, which is determined by the needs of local branches of government (e.g., county, town, and school boards), to cover the costs of schools, road maintenance, and so on. For example, your tax rate might be $2.7864 for every $100 of the assessed value, or .027864. Whatever the tax rate is, and they do vary significantly from locality to locality, the math works the same. You pay that amount for every $100 your property is worth.
Please don't be put off by the math! Once you know these four components, it's easy to calculate what taxes you'll be expected to pay on your property. First figure out the assessed value. Then multiply that by the tax rate. If your assessed value is $2000,000 and the tax rate is .027864, your tax bill will be $5,572.80 for that year. Yikes!
Let's go through this same example in slow motion:
Your home's appraised value is $200,000.
Multiply that by the assessment ratio in your community, which we'll say is 100%.
That means the assessed value of your property is also $200,000.
Multiply that assessed value by the tax rate of .027864 to figure out what you're expected to pay for that year: $5,572.80.
Now it's your turn! To find what your tax should be, multiply your home's appraised value $_______________ by the assessment ratio in your community ______%, to get the assessed value of your property - $___________. Multiply that assessed value by the tax rate of ______% to figure out what you owe: $_____________.
While math errors are not to be expected in the Cyber Age, it pays to double-check the math - especially if you're the kind of person who balances your checkbook regularly. As a first-time home buyer, I know I will be taking a close look at the calculations.
Tip: Becoming familiar with the terminology and the formula will help you in your encounters with the assessor and hearing officers.
Pick Your Battles Carefully
While it takes some effort, it's well worth investing the time and energy to make sure you aren't paying more in property taxes than is fair. Remember, you may end up with a tax break ... not only for this year... but for years to come. Sounds great, doesn't it? But railing against high tax rates won't get you anywhere. Decisions about them are out of the control of the local officials who can take another look at your tax bill. Of the four components that go into calculating your tax bill, the only one you have a chance of getting changed locally is the assessment, the amount that the assessor decided your home is worth, aka its appraised value.
Everything else requires the involvement of legislators and other policy-makers. By all means, get involved in the political process! Just don't expect your tax bill to show an immediate response. So... back to what is possible for your current tax bill...
If you bought at the height of the market, when prices were at their highest (like I did) and your assessment reflects the price you paid, even though the market really took a dive where you live, you may have an especially good case for getting that amount lowered. After all, if you tried to sell the house now, you'd get less than you paid for it, maybe a lot less, thanks to the subprime mortgage meltdown.
What's Happening to Property Values?
According to the Center for Responsible Lending, which expects some 2 million subprime foreclosures, the high foreclosure rate will result "in a severe drain on property values - even for families paying their mortgages faithfully every month - and will cause 44.5 million homes to lose a total of $223 billion in wealth over the next few years, most of it in 2008 and 2009."
Whether you're a new homeowner or not, it's well worth it to double-check your assessment. Math errors, incorrect classifications, and out-of-date information are just a few of the reasons that your assessment might be just plain wrong.
It's a safe bet that the process for getting your assessment changed will be somewhat involved -- it always is. It's likely to be especially challenging this year because property values are heading down throughout the country as more and more homes go into foreclosure. As a result, some communities are taking a fresh look at local property values. An increasing number of people are going through the grievance process to get their property taxes lowered. That is, following the detailed local rules, they are trying to show that their property's assessment is too high, either because of errors or because of how their tax bite compares with other homes in the community.
Foreclosures mean that localities are collecting a lot less in property taxes. To make matters worse, not all those houses are selling, which means fees collected on every sale are not making up the shortfall in the coffers. And with Internet sales up, there's fewer sales tax being collected. City and county governments are all feeling the pinch, scrambling to come up with ways to save money without cutting back too much on services. The situation is likely going to get worse before there's a turnaround in the real estate market and the economy in general.
Changes in home values may seem dramatic to us, but bureaucracies are slow to respond. As a result, don't expect to see officials bending over backwards to give a reduction in property taxes simply because an assessment is a little too high. If it's out of whack with the appraised values of similar homes, that's a different story. Keep reading.
Follow These Six Steps to See If You Can Get Your Taxes Cut
1. Call or visit your local assessor's office to find out what the process is to question the amount you have to pay in taxes and to get a copy of your property's assessment. Don't wait to get your tax bill. According to New York State, "By the time you receive your tax bill, it will be too late to file a complaint against the assessment on which your bill was based." While that may not be the case where you live, why take a chance?
Don't go in with an attitude or expect an encounter with the bogeyman! While your town's assessor may be busier than usual, more than likely, s/he will help guide you through the process. Do ask:
What to do if you find a mistake on the assessment or a factual error about your property.
Where the best place is to find information on comparable properties. If you're in luck, your community will have this information available on the Web.
What to do if your research shows that your property isn't assessed at the correct amount compared to similar properties.
When the deadline is for this (or next) year and what other details you should know so you can follow the process to the letter.
If you're eligible for any special property tax rebates - perhaps because you're a senior citizen, have a low income, or maybe because you simply live in your state. For example, New York has a program known as STAR (School Tax Relief) to save homeowners money on their school taxes. By completing a short form, folks in the Empire State see a reduction on their next bill. So ask your tax assessor about any possible programs.
2. Go over your home's assessment in detail. Note all discrepancies - especially major ones. Does it say that you have three bathrooms instead of two? Is your house closer to 2,500 square feet, rather than the 3,500 square feet that shows on the assessment? Measure to find out the exact footage. Is yours a frame house, not brick? Did a typo make your dwelling appear a couple of decades newer than it actually is? Does it say that your home is in good condition when what you really own is a fixer-upper with a wet basement? Errors like these, that make your property seem more valuable than it really is, can cost you money every year - for as long as you own your home.
3. If you find mistakes, speak to the assessor and request that they be corrected. Be nice! No one wants to help a meanie. Tax assessors, being human and hassled, make mistakes. Doesn't everyone? It's nothing personal, so don't treat it that way. Hopefully, you can resolve these errors in a pleasant meeting with the assessor. If photos will show what you mean about the assessment being incorrect, bring them with you, along with your measurements, your property's survey, a recent appraisal ... anything that will objectively show what you mean.
In many communities, your only alternative will be to file a grievance. Be sure you understand what is required, when the deadline is, where and when the hearing will take place, and so on. It'd be a shame if a technicality kept you from saving on your taxes ... but it might if you're not careful. Remember: It's well worth the investment of your time to make sure errors that pump up your property's assessment are corrected. You'll cut your home owning costs for years to come.
4. If there are no mistakes or they are in your favor (it happens, folks), you still want to make sure your assessment is the same or lower than comparable homes. If you find similar homes that are assessed for less than your house, they pay less in taxes than you do. If you find better homes that pay less, you certainly have good reason to appeal for mercy ... that is, a lower assessment!
Make sure you know the grievance process in advance and follow it throughout. A good way to get going is to take a walk around your neighborhood and jot down the addresses of homes you think are quite similar to your home - that is, they are about as old and large. Take pictures of ones that also seem in the same condition, if they are on lots that are about the same as yours. If you have a double corner lot, don't bother with smaller lots, and vice versa.
While you're strolling, write down the addresses and take some pictures of homes that are probably worth more than yours - that are bigger, sturdier, newer, and so on. If you discover that they pay less in taxes, you'll have a good case to make. Similarly, if you know of any homes that have recently sold in the area, include them as well. If they are comparable to your home, but sold for significantly less than your home's assessment, you'll have more to talk about at the hearing.
Hopefully, your assessor can give you the link to a website that has accurate information for your community so you can look up these addresses, check the property details (e.g., square footage, number of rooms, size of lot), and see the assessment as well as what they are paying in taxes.
The comparisons are much easier to find when you can cruise around one official site and soon see what every house in your neighborhood is worth. If that's not possible, stop by a local real estate office and ask an agent to help you use the Multiple Listing Service (MLS), which is hopefully computerized in your county. You may discover that there is easy public access to MLS. If not, it won't take a realtor long to help you out, and they surely need all the friends they can get these days!
Typically used to help buyers find homes, the data that appear on MLS make it easy to look up the homes you scouted out. While you're at it, use MLS to find other similar homes to see how much their owners pay in taxes. MLS can also be used by the realtor to perform a "comparative market analysis" of your home -- where it is compared to similar properties that have recently sold.
It'd be great if the realtor would print out this information for you, which may even include pictures of the inside and outside of these homes, if they have changed hands in the last few years, and if they are currently on the market. You'll want the print-outs as part of your case during the grievance process. If s/he balks at the expense, you can point out that sooner or later, you'll be a seller and a buyer in search of an agent - or simply ask to have links to the relevant documents emailed to you so you can do the printing.
If your municipality doesn't make the information available online and MLS is still in the Dark Ages, you may find yourself having to go to a county office building for the information. You assessor will be able to tell you the best way to find the information you need on comparable properties.
5. In building your case, take another look at your house. When Diane Rosener, who published a penny-pinching newsletter for many years, challenged an unfair increase in the assessment on her house, she decided to take pictures of the inside - "our focus was on anything outdated, including the 1960's kitchen and bathrooms, the old plumbing and wiring, and the remains of the 1950s family room in the basement. We took pictures of our problem areas and 'works in progress.' For example, the plumbing leak in the living room ceiling, the hardwood floor that has plywood 'patches,' the entry with a plywood floor and the cockeyed step, and the toilet in the basement that isn't connected to plumbing."
Diane, who put together quite a dossier, was able to get the increase in her home's assessment knocked down by 40%! She advises: "A picture is truly worth a thousand words. You will be trying to convince someone to lower your property taxes who hasn't seen your house, or maybe hasn't even been in your neighborhood. Take plenty of photos, even if you don't use them all."
Here's a great tip from Jenny C. McCune at Bankrate.com: "Make sure that any property changes, particularly those that would negatively affect the value of your home, are part of the assessment. For example, maybe a bridge has gone out near your home, making your house much less accessible (and less valuable). Don't forget any modifications you've made. If you've torn down a garage to increase garden space, your home's value likely would be less."
6. Presentation is everything! The local tax office may have forms that you have to fill out. If not, put together a brief overview that summarizes what your property searches revealed. "Using the MLS Comparative Market Analysis feature, we discovered that there are six houses exactly like ours that recently sold in our development for 20% less than our home's assessment. We have attached that analysis as well as photos of the relevant properties, including our own. Also, measuring our home exactly as the assessor advised, we find that it is 2,500 square feet, and not the 3,500 square feet that show on our assessment."
Make sure you organize the pictures and documents you collect. Highlight the key findings so a referee can look through the pile and see that the comparables are truly comparable, and that they are assessed for less than your house. Likewise with any similar homes that have recently sold for less.
"Consider sitting in on somebody else's hearing before your appeals date," Jenny C. McCune advises. "Here you'll see how the board operates. You can also get a sense of what arguments do and don't work."
Diane Rosener recommends that if you don't get an answer on the spot that you "leave the documentation with the referee or committee. (Be sure you've made copies for yourself.) You want the person making the decision to be able to look through the documentation and pictures at his own speed instead of having to rely on his memory."
If things don't work out the way you hoped, you can find out what the appeals process is. At that point, you'll have to weigh the possible tax benefit against the costs of going to court. (You can do the math and see if your potential tax savings will be worth the expense.)
But if you did your homework in the first place and were able to show that your property's assessment is unfair in a calm, reasoned way, the odds are very good that you will get your taxes cut. Good luck!