You are a typical homeowner: you worry about mysterious noises behind walls, taste the smell of the garden after a storm and dizzy follow the rapidly rising value of your home.
That excited emotion can later give way to a sinking feeling, when you receive an assessment notice from the property tax. As the home’s value skyrockets, the amount you pay in property taxes is likely to rise as well.
The magnitude and timing of that increase will vary depending on where you live. Real estate tax liabilities can add up quickly in some states, such as New York and New Jersey. Even states that officially limit annual increases, such as California and Texas, can see annual tax increases of hundreds of dollars.
Values can rise faster than taxes
Property tax bills don’t always keep pace with the rapid growth in home prices. “An appreciation in value doesn’t necessarily mean property taxes will rise proportionately next year,” Lee Pierce, senior vice president of loans for Seattle Credit Union, said in an email.
That’s good news if you own a typical home. According to the National Association of Realtors, the median sales price of an existing home increased by 12.6% in 2020 and by 13.3% in the 12 months ending September 2021.
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Caps may not always hold estimated values
Many state and local governments boast that they control tax bills by restricting estimated values. The District of Columbia and 18 states, including the three most populous (California, Texas, and Florida), restrict how much assessment of real estate tax can rise every year, according to the Tax Foundation, a think tank focused on tax policy. New York City and neighboring Nassau County, on Long Island, also limit the rise in estimated values, according to the Lincoln Institute of Land Policy, a think tank focusing on land use, stewardship and taxes.
However, the caps differ in their level of protection. According to the Lincoln Institute, the estimated value can increase by up to 2% per year in California, 3% per year in Florida and 10% from one rating to another in Texas.
Local governments are finding ways to increase homeowners’ tax bills, despite the limits imposed by state governments. For example, the median property tax paid on a home in Marin County, California, rose 9% from 2018 to 2019, to $8,103, according to data from the U.S. Census.
Tax rules can keep owners in place
There is a problem with laws limiting increases in rated values. They can deter people from moving to upgrade or downsize, and result in neighboring homes with differing tax bills for similar properties. California is a good example.
While you own a house in the Golden State, the tax bill will almost certainly increase more slowly than the value of the house. But when you sell, the estimated value resets to reflect the actual market value. The new owner’s tax liability may be much higher than you paid.
When recent homebuyers pay a much higher share of taxes than old homeowners, a situation arises where: newcomers subsidize the old-timers. Even if you think that’s fair, it’s theoretically a disincentive for someone to buy your house.
It will also make you think about moving, as you too could end up paying a dramatically higher property tax assessment on your new home.
“Moving from one home to another generally involves abandoning the preferential tax treatment built up through years of undervaluation, creating a ‘lock-in effect’ where homeowners are discouraged from moving,” Jared wrote. Walczak, vice president of state projects for the Tax Foundation. in a 2018 article.
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How to monitor your taxes
States have other ways, besides limiting assessments, to limit the growth in property tax collection. Some prevent local governments from inflating millage rates (the tax paid for every $1,000 in taxable value), and some limit increases in total tax revenues.
While many states protect homeowners from shocking real estate taxes, you could still be vulnerable to an increase that cramps your budget. There are a number of ways to prepare.
If you pay property taxes through an escrow account for a mortgage, the loan servicer will send an escrow account disclosure early each year. This overview contains the expected annual costs of property taxes, homeowners insurance and mortgage insurance. It may include a breakdown of last year’s escrow payments, including property taxes paid, along with projections for the coming year.
If your administrator is unable or unable to pay the assessment for the past year in full, you must pay the difference. You can tell the administrator to withhold more each month to avoid shortfalls, Jeffrey Wood, a certified public accountant, investment advisor and partner at Lift Financial, in South Jordan, Utah, wrote in an email.
Your county tax advisor will notify you, sometimes months in advance, of your upcoming tax bill. The information can come in a letter, or you can check the website of the tax advisor.
Search for terms like “total tax” or “tax payable” and you’ll find your tax amounts for this year and last year. Then you can calculate how much your taxes will go up.
If luck and favorable tax laws are in your favor, your giddiness over the rising value of your home won’t be offset by property tax panic.