U.S. Property Investment Advice: Property Taxes

Looking to invest in U.S. real estate? Anyone looking for property investment advice is likely to be thinking about location, foreclosure sales, pricing, and how to properly assess what an investment will cost in terms of rehab and resale. You probably aren't even thinking about property taxes, but you should be.

Property tax assessments vary wildly from state to state and from location to location within each state. Sometimes, property tax assessments vary wildly from neighborhood to neighborhood, and sometimes the assessed tax on a given real estate investment bears no rational relationship to the current market value of the property.

The process for determing property taxes is very different from the process for determining the sale price of a real estate investment. First the city or municipality in which the property is located has to draw up a budget for the coming year and get a dollar amount. The budget includes city salaries, expenses, and bond indebtedness. That budget number is then divided by the assessed value of all the real estate in the city to get the property tax rate, and that rate, when multiplied by the assessed value of the real estate investment determines the amount of property tax that must be paid each year.

So, the property tax is the result of the tax rate (which will be different for each city) multiplied against the assessed value of the real estate investment property.

That amount may or may not make intuitive sense.

The assessed value is usually a fraction of the market value of a home, but that assessment can be way off before the tax rate is ever multiplied against it. For example, in Nassau County NY, 415,000 residential property parcels were found to have been assessed at market values from 1938.  Under the new assessments, some property owners will pay dramatically less and some will  pay a lot more.

In Newark NJ, tax reform legislation was initiated when it was discovered that 23% of the properties in Newark paid 100% of the taxes.

A recent law passed in Montana limits assessment increases to 2% per year, after inequalities in property tax practices were discovered and after it was noted that towns were overspending and taking it out of homeowner's hides.

City governments are not generally known for their efficiency or their fairness. Often properties in the worst neighborhoods are taxed the most by artificially hiking the assessments. It is not unusual to find a slum property assessed at as much as ten times its fair market value in many midwestern states, while homes  in nicer neighborhoods  get by on assessments that are far below the properties' actual worth.  This happens for the same reason lots of other unfair things happen when government is in charge: inefficiency, corruption, politics, and the need to raise lots of revenue while generating the least conflict.

It is possible to appeal property taxes on an investment property when they seem to be way too high. However, it is important to go in prepared and with legal help if necessary.

Contact the tax assessor in the city in which the investment property is located. That office will provide the protocol for appeal. You can decide at that point if it is worth the trouble or not. Be advised that if you appeal and lose, the chances of ever getting the property taxes reduced go down to about zero.

Some locales have web sites set up to help new homeowners appeal property taxes. A newly created New Jersey website www.easytaxfix.com is set up for anyone who has an appeal in the state of New Jersey. Because the deadline for appeal in New Jersey is April 1, it's pretty hard to get to that website these days, but there are others.

With city governments hungry for money in recent years and state and federal help for cities minimal or nonexistent, property taxes can be badly out of whack. If you think you might be looking at an overcharge, do some research, be prepared, and file an appeal. Many books are available that explain the assessment process and help you to head off obstacles to getting a fair appraisal and lower taxes.

At the very least, make sure you look at the property taxes before you buy.

An outrageous tax bill could  be deciding factor between two 'deals' that, all other things being equal, look great.