As a real estate professional, it’s important to educate and prepare buyers on all aspects of the homebuying process, including property taxes. Property taxes are a significant expense that can impact a homeowner’s finances for years to come, so it’s essential to ensure that buyers understand what they are, how they work, and how they can affect their budget.
In this blog post, we’ll cover what buyers should know to navigate this complex and often confusing aspect of homeownership.
Helping Buyers Estimate their Future Property Tax Payments
Many first-time homebuyers make the mistake of assuming that the seller’s current property taxes will be the amount the buyer is obligated to pay in the years subsequent to their purchase. Any change of ownership or property improvements can trigger a reassessment of a property and potentially result in higher taxes.
Helping homebuyers calculate taxes can help them budget for future expenses. Luckily there are some tools like:
- SmartAsset
- County’s Website
Generally, taxes are determined by multiplying the property tax rate (or millage rate) by the current market value and are recalculated anywhere from one to five years by a local tax assessor. The lower the valuation of a property, the lower property taxes will be.Taxes that are not based on the value of the home (non ad valorem taxes) will need to be added in after the calculation.
The market value is based on both the land and structures on it, but the method of assessing property can vary from one local government to the next.
- Explain how to use online tools to estimate property taxes
- Provide step-by-step instructions for calculating property taxes
- Offer tips for helping buyers budget for property taxes
Two important factors calculate property taxes:
- Municipality’s tax rate
- Most recent assessment value of your property – Just value minus any deductions
Explaining How Property Taxes Are Paid
After closing on a house, the process of paying taxes can depend on what type of mortgage you have and your lender’s requirements.
An escrow account is set up at closing with a financed loan and managed by your mortgage or loan servicing company. The servicer will deposit a portion of each monthly payment into your escrow account to pay for the expected property taxes and home insurance and flood insurance premiums. However, it won’t pay for homeowner’s association fees, monthly utility bills, or special assessments.
An escrow account is required for government-backed loans like FHA and USDA loans, but even lenders offering conventional loans may require this of borrowers. That’s because local and state real estate tax liens take priority over other liens on your property. In order to preserve their first-lien priority, lenders want to control tax payments.
Escrow accounts benefit borrowers by:
- Spreading payments out over the year instead of paying a lump sum at once
- Making it easier to budget monthly expenses
- Reducing how many parties you pay
If buyers don’t have an escrow account, they’ll be responsible for sending out checks or paying over the phone to their tax collector.
Educating Buyers on Ways to Make Taxes More Affordable
Discussing Installment Plan Options
While paying in installments may not technically lower a tax bill, it can lessen the burden by splitting up payments over time. This is especially significant for homeowners who have paid off their mortgage, do not have an escrow account, or do not have a mortgage. Some states already bill their taxes in installments, but they may allow homeowners to split it into as many as quarterly or monthly installments.
There is typically a minimum tax amount or property value requirement in order to qualify for an installment plan. For example, in the state of Florida, the estimated tax due must be $100 or more. Additionally, while a county or town may not offer installment plans, additional taxing authorities may. Check with your local government to see if you can you are able to work out a payment plan and when the deadline is to apply.
Encouraging Buyers to File for Exemptions
By receiving a property tax exemption, homeowners are limiting the property value they have to pay taxes on, thus, reducing the final billed amount. Exemptions are not automatic and must be applied for before a specified deadline.
How to receive exemptions:
- Explore local options
- Check Eligibility
- Apply before the tax authority’s deadline
Homestead Exemption
Homestead exemption is the most common exemption that can be applied to a property. Each area has its own criteria to qualify for homestead exemption, but typically, it offers financial protection for homeowners who reside on their property full time. Some states tie the homestead exemption to age, income, or other criteria. Let’s say that a property’s value is $250,000, and a homeowner receives a $50,000 homestead exemption. The tax rate will be calculated based on $200,000 instead of $250,000.
The deadline in Florida is March 1st, for qualifying residences owned and occupied on the January 1 tax day.
Senior Exemption
In addition to a homestead exemption, a senior exemption provides relief to homeowners typically over the age of 65. This exemption requirement may sometimes be combined with homestead exemption. For example, in Ohio, a homeowner must be over the age of 65 to qualify for homestead exemption. Additionally, this exemption may come with various income restrictions and residency requirements.
Veteran Exemption
There are different types of exemptions available to veterans and their families that range anywhere from a fixed amount discount to a 100% exemption. These may apply for:
- Disabled veterans
- Deployed service members
- Surviving spouses
Homeowners can qualify for and receive more than one exemption. Hypothetically, a 65-year-old disabled veteran living in a primary residence in Florida can claim veteran, senior, and homestead exemptions. Other possible types of exemptions include:
- Energy Incentives
- Agricultural
- Disability
Did you know? Hawaii has two unique exemptions: Leprosy exemption – an exemption of $15,000 in Hawaii county and a “Safe Room” exemption in Kauai County.
Informing Buyers on Mailers
When buyers purchase a home, their records become public information and many businesses use this as an opportunity to flood their mailboxes trying to sell their services. From pest control to lawn services and water softening, these businesses seize the opportunity to reach out to potential customers. While receiving coupons and promotional materials can be beneficial, crucial pieces of mail can often get mistaken as “junk mail” and inadvertently discarded like:
- Notices of Servicing Transfers
- TRIM notices
- Tax Bills
- HOA Notices
- Homeowners Insurance Policy Information
It is advisable for homebuyers to exercise caution when sorting through their mail. While it is important to be vigilant about potential scams or fraudulent mailings, it is equally crucial to be mindful of the content that might hold valuable and time-sensitive information. Encouraging buyers to take the time to carefully review and identify essential documents amidst the promotional materials can help ensure that no critical information is inadvertently discarded or overlooked.
Disclosing Rights as a Homeowner
Many buyers are unaware of the rights they have as a homeowner that help them make informed decisions. Homeowners have the right to:
Equal and Uniform Taxation
This includes:
- Voice their opinions at open public hearings
- Fair treatment by the appraisal and tax office
- Notice of property value increases, proposed tax rates, and estimated tax amounts
Assessment Notices
Each state handles tax and assessment information differently, but homeowners are typically sent an annual notice listing the proposed property taxes, value assessment, and dates and times of public hearings on a tentative budget. While each state uses different terminology for this document, it is often referred to as a Truth in Millage (TRIM), Notice of Assessment (NAV), or Notice of Property Value (NOPV). The frequency at which taxing authorities readjust their tax rates varies by state. Some change them annually, while others do so less regularly, such as once every three to five years.
Access to Public Hearings
Homeowners are entitled to a voice in decisions that affect a home’s local tax rate. Taxing authorities are expected to make every reasonable effort to provide notification of public hearings to taxpayers. During the hearing, a tentative budget is amended as it sees fit to ensure all costs are covered for important local services, a final budget is adopted, and a tax rate is decided. Homeowners may attend these hearings to make comments and ask questions. Public opinion can make a big difference, and a homeowner’s influence on public decisions can go a long way.
Walking Buyers through the Valuation Appeal Process
If homeowners feel that they are paying too much compared to similar properties in their area, they can meet with your property appraiser to discuss their concerns or petition the county value adjustment board to appeal your home’s assessed value. National Taxpayers Union Foundation estimates that 30%-60% of properties in the U.S. are over-assessed. Sadly, less than 5 percent of homeowners will challenge their value due to either being unfamiliar with the process or feeling intimidated by confronting the county government.
Here are a few things to keep in mind:
- An attorney or Realtor is not required, although professional guidance is recommended
- You can attend an appeals board hearing beforehand to get a feel for the process.
- Submitting an appeal is simply a request for review
- There are no consequences for appealing
Sometimes, errors can occur in property tax assessments, and homeowners have a right to question them. Not only can homeowners end up paying more taxes if taxes are over-assessed, but it could make the property harder to sell in the long run if taxes remain unreasonable. While the property taxes aren’t really changing through this process, by challenging a property’s assessment, you are partially determining the amount of property taxes you pay. There may be a small window to dispute any discrepancies, so homeowners will want to start the process as soon as possible.
Four steps to submit an appeal:
- Research the appeal deadline in your state and fill out the appeal application
- Check the accuracy of the assessor’s math and description of your property
- Locate at least five comparable properties
- Compare your property’s assessment against the assessments of the comparables
The outcome of an appeal may be determined at a hearing or mailed as a written decision. If a homeowner still isn’t satisfied with the ruling and believes they have proof that their property taxes are not fairly assessed, they can take it higher and appeal to your state’s appraiser or the Superior Court. At this point, it is recommended to hire an attorney.
Title professionals play a crucial role in educating property buyers about the intricacies of property taxes. By providing buyers with the necessary information on taxes, title agents can help buyers make informed decisions about their property purchases and avoid any unexpected financial burdens
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