Understanding Property Taxes and Assessments

One thing’s for sure: homeownership is more complicated than renting. When you rent, you pay first and last months’ rent, the security deposit and you move in. When you own a home, your costs are a little more complex. Above and beyond the mortgage payment, you have to consider property taxes and assessments to get a true picture of what homeownership actually costs. Understanding each of these expenses empowers you to accurately predict and control what your monthly expenses will be once you own your home.

Property taxes. Every year, the city, county and state charge taxes on every parcel of real estate located within their borders. For many homeowners, these property taxes are the second largest expense of owning a home (after mortgage interest). In most areas, property taxes are governed by state law, but assessed and collected by the county on an ad valorem basis (ad valorem is Latin for “according to value”). They are calculated annually by applying a certain tax rate to the assessed value of the property.

Direct assessments. Unlike ad valorem property taxes, bonds and direct assessments are flat fees imposed on each parcel of real estate in an area after a city- or district-wide vote, in order to fund various services for that area not covered (or insufficiently funded) by property tax revenue. Some of the public projects commonly funded by bonds and direct assessments are:

• street landscaping and lighting
• public transporation
• library services
• vector control (i.e., pest control)
• parks and recreation
• violence prevention and increased police presence
• local schools

Special assessments. In recent times, many cities have required subdivision developers to build and ensure long-term funding for the parks, schools and emergency services that will directly benefit their subdivision to prevent the influx of new homes from causing a drain on existing municipal services. These dedicated services, which may be located within the subdivision but are often made available to all area residents, are funded in the long-term by special assessments.

When considering a particular home, research the ad valorem tax rate and any bonds or assessments that may apply to that property by visiting the county assessor’s Web site and searching for tax records for that particular property address. The current tax year’s data is also usually disclosed from seller to buyer during escrow. This will allow you to plan your monthly budget and ensure you can handle the true, total costs of ownership -- beyond just the mortgage payment.

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.