Evaluating Real-Estate Taxes
Property tax is the primary source of revenue for the American municipality, whether it be a city of millions or a single-traffic-light hamlet. The character of the community's real estate is a major factor in determining the tax structure.
Everyone pays property taxes in some form. Tenants pay in their rent and homeowners and condo owners pay taxes directly to the local government or through their mortgage lender. Co-op owners pay in their maintenance fees. Condo dwellers actually pay two property taxes: the tax on their own unit and a portion of the real-estate tax for the common areas of the complex (paid through their monthly maintenance fee).
There are two factors used in formulating the amount you will pay in property taxes: mill rate and assessed valuation. A mill is one-tenth of one cent. It is the actual dollar figure you pay on each $1,000 of the assessed value of your property. So, if your home is assessed at $100,000 and your town's mill rate is 23.7, then you must pay $23.70 for each $1,000 of assessed value. Multiply 100 by 23.7 to give you a tax bill of $2,370.
Seems simple, no? But it gets more complicated. Many, if not most, municipalities express their mill rates in terms of rate per $100 of assessed valuation. Using the above example, this would be expressed as $2.37 for every $100 of your assessment. To calculate your tax bill, you would figure out how many $100 units are in $100,000 (answer: 1,000). Then you would multiply 2.37 by 1,000 to come up with the same result as above: $2,370.
Searching for the town with the lowest mill rate will not bring you the lowest property taxes. Not every town bases its mill rate on an assessment of 100 percent of fair market value. Town A might have a mill rate of 23.7 on 60 percent of fair market value assessment, while Town B has the same mill rate on 100 percent of fair market value. Thus, you will pay considerably lower taxes for the same amount of house in Town A.
When you anticipate your mortgage payment, always include the realestate taxes! Your lender will almost always insist that you add a tax escrow to the mortgage payment, which means you will pay one-twelfth of your real-estate taxes each month. Your escrow is not a fixed amount; as taxes rise, you will be required to increase your payment. Be prepared for this rise.
In a country as varied as ours, there are any number of tax rates, and there are still places where homeowners are paying 11.5 mills on a 40 percent assessed valuation established in 1975! It is best to call the town collector's office or ask your real-estate agent for tax-structure information on the towns that interest you.
If you should discover that the low taxes of a particular community are based upon an evaluation done 10 years or more ago, be wary. Another assessment may be in the works, and you may face a significant jump in taxes soon after you buy a house there, based on the new assessment.
Residential taxes are not, of course, the only source of revenue for a municipality. Income is also generated by taxes on business and industrial property. A town with a high proportion of both is, therefore, likely to have a lower overall tax rate, since taxes on the nonresidential structures help offset the cost of services to community residents.
Once you learn what the taxes are in a specific town, your next question is probably going to be, “Will the taxes go up?” Do not simply take the real-estate agent's word that the area has a stable tax rate — do some investigating on your own.
Talk to local government offices, home sellers, and residents. Those who live in the town will probably be quite helpful and, especially if they are annoyed at one thing or another, delighted to bend your ear about the spendthrift/mindless/money-wasting folks they are sure inhabit city or town hall. Following are some points to consider:
Is the town about to undergo a re-evaluation of its property taxes? Will there be a reassessment after that reval, as it is commonly known? It is certainly rare for taxes to go down in such situations.
How do the present and projected school populations relate to the school facilities in the town? Will the town need more teachers or even a new school (or a few new schools) in the near future? Is the population stable or diminishing? Will a school be closed, perhaps?
How much open space exists? How is it zoned? More new housing, of any kind, can increase the school population and the demand for municipal services, like new roads, more than the added tax dollars they generate — thus, higher taxes for everyone. On the other hand, new office buildings, industrial parks, shopping centers, and the like can cushion the tax demand on individuals.
What shape are the town buildings and equipment in? A new town hall or a new police station can cost plenty. Even buying new fire trucks and police cars can increase the taxes somewhat.
How has the town dealt with taxes over the years? Have rates been relatively stable? Have there been any scandals regarding mismanagement or misappropriation of municipal funds? Is the town financially healthy?
