Property taxes in regards to investment property

11 Replies

Question #1: Upon the purchase of an investment property that you will be rehabbing, its understood that property taxes are to paid. But at what point? At closing? I'm also told that property taxes are a holding cost, so are you paying it monthly during the rehab project? Or are you just paying it all at closing? How am I supposed to pay it at closing when I don't know how long the project will take? 

Question #2: And whats the best way to calculate and budget for property taxes? I assume a 3% tax rate of the ARV. I do this because I recently looked online and the highest tax rate for any given state is 2.40% for New Jersey. Is it safe to calculate and budget property tax costs this way?

The title company will prorate property taxes to you as the buyer. If you buy a property on July 1st of this year, then you about 1/2 of the property taxes will be prorated to you. Based on the state you are buying, this might be a credit on the closing statement. For example, here in Florida, 2018 property tax bills come out in November. As such, if you buy a property now, you will get a credit on the closing statement.

@Brandon Gamblin

Good understanding on how it’s done by @Lance Lvovsky  

KISS-If you get a property tax bill, school bill, garbage bill, pay it. It will be evened out by the title company at closing and you won’t be paying late fees. 

Usually property taxes are collected by counties.  You may be able to find tax rates on the county web site.  This can sometimes be confusing because the county collects taxes not only for the county but also cities, school districts, utility districts, and other entities.  So, you would need a specific property to know all applicable taxes.  You can often look up prior tax bills on the county tax assessor's web site.  This is usually distinct from the county recorder's site, though the two are related.  A warning:  these systems are often archaic and difficult to use.  Don't give up and you'll figure it out.

As @Lance Lvovsky describes these are pro-rated by the title company (or attorney) when you buy and sell.  For a simple example, if the yearly taxes were $1800 and you bought on April 1 you would get a credit from the seller for $450.  If you then sold on 10/1 you would have a debit to the buyer for $1350.  That difference, $900, is your property tax payment for the time you owned it.

Timing of the payment makes this a little more complicated.  Here is CO, tax bill's are not due until the spring.  So, if you bought on Feb 1 in my example, you would get a credit of $1800 for the prior year plus $150 for January.  Then, in (say) March you would pay the prior year taxes of $1800.  If that seems unfair, recall you were credited that $1800 at closing, so its not money out of your pocket (though it will certainly feel like it).  Then if you sell on Aug 1, you would have a debit of $1050 for the seven months of taxes.  $150 of that is, again, the credit when your purchased and another $900 is the tax for when you owed it.

The "value" the assessor uses to come up with your tax bill is yet another point of complexity.  It may or may not be affected by your transaction.  In some locations a sale immediately changes the value.  In others values are determined for an area every few years and bear only a loose relationship to sales prices.  Some areas also tax you on only a percentage of the value.  Again, have a look at the assessors web site.  If you can find old bills that will give you a pretty good idea.  But also look at how sales affect values.

@Jon Holdman and @Lance Lvovsky

You guys mention the terms credit and debit, of which I never heard before until now. It sounds like the seller debiting the buyer and the buyer receiving a credit from the seller are expressed as being different sides of the same coin or idea, but exactly how is this exemplified? Is a credit documentation that the seller gives to the buyer? 

Those are accounting terms.  Think about your checking account.  When you deposit money that's a credit to your account.  When you write a check (OK, use your debit card) that's a debit.

When buying a selling real estate there is a "settlement statement" aka a "HUD-1" form that's created by the title company. It has two halves - buyer's side and seller's side. These taxes would appear on both sides. They are indeed two sides of the same coin. When you buy, you will have a credit for the taxes the seller owes and the seller will have a debit in the same amount. This reduces the amount of money the seller walks away with. It also reduces the amount of money the buyer has to bring to the closing. The buyer will later have to cough up that money, as described above.

Go to your County's property appraisers website and enter your property address. it should tell you at least last years annual property taxes. Budget for 5% above that amount. Your county property appraiser office will send a bill to either you or your mortgage company depending on how your closing docs specified property taxes to be paid. You or your mortgage company pays taxes. End of story. if paid, no problem. if not. a tax lien will be imposed on your property (usually by the county of the property).
@Jon Holdman Actually bank account statements are many times opposite accounting methods. in accounting, per an accountant a deposit to a bank account, an asset account is a debit. A decrease to a bank account is a credit and the corresponding debit goes to an expense account. ie., banks record their transactions the opposite of how customers do.

Property taxes are a way of paying for government services to the community. There are all types of things that are factored in property taxes. I'm not a thug, so I wouldn't suggest you tell them they can't get money, because they are coming at you with force. Property taxes is usually a certain percentage of the market value on an annual bases (maybe paid on a different frequency). If you are aiming at taxes breaks look to see what is needed in a geographical area. Real Estate is not all about housing, there's other types of real estate. Usually the taxing authority for a geographic location may be offering or would consider a tax break because of your contribution to that area.

Your estimation of 3% may be right in your area but not for the reason you posted. As others said, look on the county assessor website and you will see all the taxes. Websites like realtor.com, Zillow, and redfin usually have the prior years taxed as well. New Jersey does have the highest tax rate but it is way more than 2.4%. That statistic is just the base state tax. Once you add in county, city, school, hospital, and all the other stuff the government tacks on it comes to much higher. I've seen probably the same website you are talking about and Texas usually comes in at about 28th near 1.6%. Well most cities around me are usually 2.5-3%. So to answer your second question, no that is not a safe way to estimate it. You should look it up for the area the potential flip is located. The title company will take care of the property taxes on both ends. This shouldn't be confused with income tax you will have to pay however. Flips are usually taxed as short term capital gains so when you do your taxes in April you will be paying for your success as well. Just set aside 20-30% of the profit you make on each flip to have ready come tax time.

One thing to remember is that everybody's taxes are different, some even have the homestead exemption. So sometimes, someone can pay a higher rate or a lower rate, the ball is up to you.