Calculating Your Property Tax Bill

These days, real estate consumers can get all sorts of information online about a particular property -- number of beds and baths, lot size, even standardized rankings of nearby schools. Multiple Listing Service (MLS) data comes stocked with all sorts of numerical disclosures to help prospective buyers rule a property in or out at a glance.

When it comes to the property tax data in many property listings, more often than not the numbers provided have little or nothing to do with how much a buyer’s tax bill will be after they purchase the property. So while publicly available property information can be empowering, ensuring its accuracy is key.

How Property Tax is Determined

In most areas, the property tax details in a listing summarize the current year’s property tax bill applicable to the home -- consider it strictly historical and informational. Property taxes are called ad valorem (“according to value”) taxes, and are calculated annually based on the county’s assessed value of the parcel of real property. Generally, when a home is sold, the assessed values are reset at the sales price -- the assessor considers the sales price to be a reflection of the fair market value of the home at the time of sale. However, in many areas, when a number of years or decades pass between sales, the assessed value can get out of alignment with the actual fair market value of the home. Often, this is because the property appreciates faster than state law will allow the assessor to grow the assessed value. In other instances, though, the market value of the home has depreciated below the assessed value.

If, for example, a home has been owned by one family for many years, the assessed value of the home might be significantly lower than the true market value of the home. Accordingly, the property tax amount provided in an online property listing may be much lower than the taxes a buyer on today’s market would pay. The converse is also true; many bank-owned, foreclosure listings have dropped in value since the last sale. As such, their property tax data is much higher than the eventual buyer will be billed. The accuracy of the tax amounts provided in the listing for predictive purposes depends largely on how close the previous assessed value is to the final sales price of the home.

And, just to complicate matters, the previous homeowner might have been eligible for any number of property tax exemptions and exclusions that may or may not apply to a prospective buyer. For example, if the previous owner lived in the home, and the prospective purchaser is planning to rent it out, that fact alone would cause a differential tax amount in counties offering a homeowner exemption to owner-occupants, but not to landlords.

Revising a Property's Tax Assessment

Most often, the mechanism for revising the tax bill to accurately reflect a new owner’s property taxes is called a supplemental assessment. The first tax bill issued after a transfer in ownership may still reflect the previous owners’ assessed value, exemptions and exclusions and the resulting property tax charges. In the months that follow close of escrow, the county assessor may send a second, supplemental, property tax assessment that shows the new owner’s revised tax data and charges based on the property’s most recent sale price. This supplemental assessment can either increase or decrease the new owner’s tax bill, depending on the circumstances.

Estimating the Tax on a Property You're Buying

While it does prevent the sometimes scary surprise of getting a second tax bill, knowing that a supplemental assessment is coming in the weeks and months after escrow closes does not resolve the issue of predicting what your tax bill will be before you buy. To predict your property taxes on any given home you are considering purchasing:

1. Ask your Realtor and mortgage professional to help you research what your ad valorem tax rate will be in the areas where you are house hunting.
2. Multiply your planned purchase price by the ad valorem tax rate. For example, if the ad valorem tax rate is 1.2 percent, and you plan to offer $220,000, multiply $220,000 by 1.2 percent to get $2,640 -- this is your approximate base property tax bill.
3. Visit your county tax assessor’s Web site to determine if there are any direct or special assessments that apply, and add them to your base property taxes to get a more complete estimation of the amount you should plan to pay for property taxes every year. Keep in mind that this is only an estimate and doesn’t account for any changes to your area’s assessments, tax rates and laws that may happen in the future.

NOTE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.