A Beginner’s Guide To Real Estate & Property Taxes

Property taxes are one of the least understood aspects of real estate. That said, what do you need to know about property taxes? Perhaps even more importantly, how can you protect your property and finances?

Property taxes can be tricky for first-time homebuyers, aging homeowners, real estate investors, and real estate professionals. So what are some of the common issues, and how can these scenarios be successfully navigated?

Property Taxes 101

Though frequently overlooked, property taxes are synonymous with owning and trading in property. While there can be other taxes involved in owning, operating, investing in, and buying and selling real estate, we are specifically focusing on the property taxes levied by a local municipality.

These taxes are based upon the value of the property, as assessed by the local Property Tax Appraisers office. They are due annually, though the exact dates can vary between different states, counties, and taxing authorities. Those buyers and owners with mortgages may also find their property taxes are included in their total housing payment. These taxes pay for items such as local infrastructure improvements, public services (law enforcement and fire departments), and schools.

It is critical for real estate owners to recognize that property taxes are not like most other bills they deal with. Failing to pay property taxes on time may not immediately impact credit scores. However, delinquent property taxes do become a lien on properties, which must be satisfied in a sale. At this point, tax certificates are auctioned off and penalties begin to accrue. If still not paid, properties may be foreclosed on. In many notable cases, homeowners have lost family homes for owing just a few dollars in back property taxes or related fees. For these reasons and more, property taxes must be accounted for.

Property taxes and First Time Home Buyers

Property taxes are a particularly sticky issue for first-time homebuyers. They are often forgotten, or at least put off till later. Yet, they can make a substantial difference in being able to hold onto a property and for how much. First-time homebuyers need to know how much property taxes are on the house they are buying, how much they can fluctuate, and be sure they are paid. When buying a home, property taxes also play into how much closing costs are and how much cash is required. Make sure to discuss this with the title company or real estate attorney so you aren’t caught off guard. This figure may be able to be negotiated too. Finally, it is crucial to check up on your title company and mortgage company to make sure property taxes are paid on time.

Aging Homeowners

Property taxes can be a concern for aging homeowners. Homeowners must have a plan for keeping property taxes up to date. If not, they could face losing their homes. This actually applies to every homeowner, as you never know when a disability or crisis will impact earning capabilities. Some options can include annuities, reverse mortgages, and income investment properties.

New Construction Properties

New and pre-construction properties have been associated with potential pitfalls. Initial property taxes can be very minimal, as they are based on the unimproved land. However, after the purchase is finalized, and new tax assessments are made, they can increase exponentially. In some scenarios, this means going up tens of thousands of dollars per year. Make sure to be aware of this, and how much they are likely to escalate.

‘Free and Clear’ Real Estate Investments

While a lot of noise has been made about working toward ‘free and clear’ homeownership, it is effectively a myth. There will normally still be insurance, maintenance, and property taxes to manage each year. Keep this in mind, and then consider whether it is smarter to invest in more property and use leverage to accelerate wealth building and passive income streams versus paying off mortgages altogether.

Professional Responsibility

Unfortunately, while mortgage lending and other factors were firmly blamed for much of the housing crisis of the early 2000s, many real estate ‘professionals’ breezed over the property tax part of the equation to streamline deals. Buyers and borrowers were left in unsustainable positions. As true real estate professionals, we must strive to educate, be transparent, and prepare clients for sustainable homeownership and investing.

Property Tax Reduction

Fortunately, there are ways to reduce and counteract high property taxes. For example; did you know property zoned as agricultural can benefit from lower or no tax? Did you know you can write it off with other deductions, such as homestead exemptions? Did you know there were discounts for paying your property taxes early in some places? Did you know that there are professional property tax adjusters that can get your tax bills lowered?