How to Budget Property Taxes

Question

Hi BP,

Another quick question as I continue my journey towards first purchase. How do you seasoned investors budget taxes?

In CA, it seemed like purchase price became the new basis for property tax, but in Columbus and San Antonio, tax rates are applied on an assessed value which is significantly lower than market value.

I have been taking the tax rate from the county's listing of the individual property and applying it to my offer price. However, this significantly impacts cashflow. On a recent deal I had under contract, the lenders quoted $107 per month in property tax which I assume comes directly from the county, but I was budgeting $353 based on the rate applied to my offer price.

My thought was that this was a conservative approach, but perhaps I am being too conservative? That is, if assessed value never, ever matches market value, I'm being too conservative, but if something changes, and assessed value catches up with market value, I'd rather have accounted for that up front.

Looking forward to any thoughts.

Thanks!

-Christian

Sergey A. Petrov · Answer

As you yourself illustrated, the taxes vary depending on location. Some properties for sale may have existing exemptions so whatever tax is being charged now, won’t be the same once you purchase. There is not a magic number that you can apply across States, Counties, or Cities. You have to look at each individually

David M. · Answer

@Christian Clark

What you are seeing is correct.  While CA is mainly on the ad valorem system, its really subject to all their various laws/referendums/whatever they do that they enacted.  So, they have a fixed tax rate and the last purchase price becomes the assessed value.  After that, the assessor can adjust that value I think up to 3% a year...

Moving more "east coast," its more of a pure ad valorem system.  So, its really doesn't matter what the purchase price is...  Look up how the ad valrem system works.  Even if they reassess the muncipality, the assessments will RELATIVELY be the same so when the tax rate adjusts to create a zero-balance budge, your tax amount is really about the same.

Also, you'll need to figure out everybody's "local system."  For example, I looked up for on person that one of those states in that "Ohio valley region," they take a percentage of the considered market value as the assessed value depending on roperty type.  For example (I don't remember exactly), residential may be 20% of market value and commercial is 30% of market value.  Apparently, this is how they cross level tax burden by making the commercial property pay a little bit more (well, i my example its abiout 50% more..)...  But, the percentages were really low which is why the assessed values are WAY below market value --- that's just the way they work with them.

If you ever want to chat about it, I'd be happy.  just send me a direct message.

Zach Wain · Answer

@Christian Clark - State by state it will vary.  Texas is similar to CA as the new property taxes will get reassessed based on the most recent sales price.  But, Property taxes in TX are higher than CA to make up for the lack of state income tax.  AZ for example the taxes are based on the county's assessed value, so it does not change after a new purchase.  Your lender and realtor should be able to help guide you through each states property tax nuiances

David M. · Answer

@Christian Clark

Oh, I forgot to mention...  In a state using a straight forward ad valorem system, I just use the current tax value, and perhaps check on how and homestead tax rebates are handled (in NJ our system doesn't actually change the tax amount listed...).  As I am used to seeing it, just because you purchased the property your tax amount doesn't change unless in more so west coast states like CA and the southwest areas.  I know people tax about recalc'ing property taxes, but I've never seen the advice along with WHICH State these requirement applies...

Brad S. · Answer

Texas is a non-disclosure state, meaning the sales prices are not recorded in the public record. But, they are available in MLS transactions and since many or most sales transactions occur utilizing the MLS, many sales prices are available to those with MLS access. Property taxes are typically based on (or calculated using) the market value of the property at the time of assessment, which are not necessarily the same as a sale price.

Although, it would be nice, you won't be assessed a tax value based on the $1 sale price you may've reported on the deed, in TX. You will be assessed based on the estimated market value of the property, as of the assessment date. Now, if you buy a newly built property in TX, you may have the low assessment based on the vacant land for the first tax year, until the records catch up the following year. But, then the Assessor will estimate a new market value to base the property taxes on.

I don't know about OH taxes, but in TX, they seem to average close 2.6%-2.8%, at least mine do. Obviously, that may vary depending on the specific area. And in CA, the assessed value is based on the market value of when the ownership transferred. In some states the taxes are based on a % of the assessed value, but the assessed value may still be based on the market value, at the time of assessment.

I don't know the price of houses you are looking at in TX, but I would be conservative on the property taxes, to be safe. The $107/mth the lenders are estimating may make sense on a $50k property, but would be low on a $200k one.

Christian Clark · Answer

Belated thank you to those who took the time to respond!

@Zach Wain Are you sure about that? I am being told Texas has privacy laws in place where the government actually can't see what the house sold for and the sales price does NOT impact tax assessed rate. Can you please double check what you were saying?

Bill B. · Answer

You might also see a huge difference if the seller was living there and you’re going to rent it out. That can be a 20% increase all by itself.

Anthony King · Answer

@Christian Clark the difference between your conservative estimate and the potential reality should not be the difference between a good deal and a negative cash flowing property. If you're that close, it's not a good deal. What I mean is, continue to be conservative in your estimates and then you will only be pleasantly surprised when your cash flow exceeds your estimates. Once you start being liberal with your estimations is when you get yourself in trouble after the sale is complete. There are always surprise expenses and fees after the deal is done because the tax man or some bureaucratic gov agency is always looking to take their cut. If you factor that possibility into your overestimations then a surprise "fee" from the "Gov Agency responsible for Equal Rights for Circus Clowns" shows up, you'll be prepared. I'd rather be surprised with more cash flow than with a tax bill, CapEx, or Maint expense that I failed to account for because I was too eager to force a deal.

How to Budget Property Taxes

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