Property Tax increases after purchasing?

Question

I was talking to my dad, who is very skeptical about buying rental properties, and he warned me to watch out for the government raising the property tax after purchasing the property.

He told me that in his current home, in the year he bought the property, his taxes got raised by $1,700. I'm thinking somehow the prior owners were not paying the market rate, but he told me alot of people at his work have experienced this. I've never heard of this happening. I'm aware that municipalities/counties raise there taxes from time to time by a small %, but nothing of that margin.

How do I ensure that the tax rate I am going to pay is going to be the prior years+whatever % increase was issued by the municipality/county?

Carrianne Mucho · Answer

@Adam Juodis - I am in California where it could be a bit different but I'll share how it works here.  When a transfer of ownership occurs, the assessed value is set at the market value of the property.  Here, we have limits to the rate of increase while a person owns the property. However, once it sells again, the property is re-assessed at the market value at the time of that transfer.  It usually takes the county about 6 months to catch up and "work" the transfer so buyers typically receive a supplemental bill 6 months to a year after their purchase for the portion that was "missed" in the prior tax year.

Regardless of where you are, it is probably a good practice to visit the county site to discover the tax RATE for the property and apply that to the Market value (not the discounted value that you hope to buy it for).  Be sure to look for special assessments, bonds, and direct charges which might be billed in addition to the tax rate.  If you use that as your estimate, you will be playing on the safe side.

Linda Weygant · Answer

This also happened to me.  The prior owner had two reductions - a senior citizen reduction and a homestead reduction.  The following year, both of those reductions came off and I was hit with a property tax bill that was almost double.  Now I know to check the county website to see what the tax bill is comprised of.  It shows the normal tax and then the applicable reductions.

Account Closed · Answer

I am not any sort of property tax expert but what has happened to a couple of my investment turn-key buy-and-holds so far is that the tax rate I initially got was based on the reduced price that the flipper paid for it and then, at some point, the county caught up with us and re-evaluated the property at the price I paid for it after the improvements which, of course, increased the taxes, and thus, my monthly payment. This also happened with our primary home--it took two years for the new garage we built to catch up with us.

I don't see any way around this sort of thing except to plan that it IS going to happen when you are looking at cash-flow--I like to build in a cushion well-above what my minimum cash-flow tolerance is for just this sort of thing. A more proactive strategy might be to check with the county prior to signing the purchase agreement to ask them about any possible increase that they see coming down the pike.

Linda Weygant · Answer

Not necessarily.  Your county website may not show the breakdown like mine does.  Your county also may not offer homestead and senior citizen discounts either.  It's definitely a county specific topic.

Raquel D. · Answer

Yeah, it's a good idea to get familiar with how property taxes are assessed in the state you invest in -- like checking the property tax rate and how the fair market/assessed value is determined (such as the purchase price).  Fair value x property tax rate percentage = property taxes.

For example, say you determine the county's property tax rate is the purchase  price.  If you buy a house for $100,000 and the property tax rate is 1%, then property taxes would be $1,000.  (This is a pretty basic estimate though -- check the county website.)

Adam Juodis · Answer

@Linda Weygant So if the county website doesn't list any tax reductions, is that a surefire way to know you're not going to get hit with a big tax increase? i want to cover my bases, a $2k increase in rent would cripple my returns haha!

Property Tax increases after purchasing?

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