Lessons learned: Courtesy of the PROPERTY TAX CODE

[Chris McKinley]

I recently learned a few lessons in property taxes courtesy of the tax code and my mortgage company that I wanted to share so they don't catch anyone else off guard.

In 2014 I purchased my first house down in Phenix City, Alabama which is right outside of Fort Benning (I'm military). I purchased the house with a 0% down VA loan and got a great deal on it because it was a foreclosure. I immediately went into the house hacking strategy that I've heard @Brandon Turner talk about so many times (though admittedly I didn't know that's what I was doing at the time haha). The house was a 5bd/3br with 3,100 sq ft that I got for 153k...unbelievable price since it was valued at over 170k then. I immediately moved in along with 4 of my friends (making it my primary residence) and they began to pay rent which covered my mortgage.

Since we are all military we were only there for a year. We all left and I got a property manager to list the house and I began collecting rent the month after I moved out. Everything was going smoothly with the house until just recently I was notified that my monthly payment to my lender went up nearly $300!! I inquired with them and came to find out it was because my escrow account was dramatically short of funds for some reason.

Upon further investigation I found out that my property taxes on the house more than doubled, going from $937 to $2,021. Because of this my mortgage company had to back fill that money over the course of the next year. They split it across the next 12 months which increase my monthly expenses by about $150 in addition to the increase in taxes I had to pay.

I called my county tax assessor to figure out how it was possible that my taxes could more than double in the course of a year. Especially since I check out comps in the area that had taxes below $1000 still. That is when I learned about the HOMESTEAD TAX EXEMPTION. This tax exemption basically states that if a house is your primary residence there can be a certain portion of that house that is exempt from being taxed. This is largely dependent upon the state you live in. I encourage everyone to check out what their state tax law says.

So, in conclusion, what I learned and wanted to share with you all is that if you are planning on using the house hacking strategy be wary of tax implications should you ever want to move out of the house. Once the house is no longer your primary residence you step into a vastly different world in terms of taxes.

I hope this post helps and keeps someone else from making the same mistake I did!! 

I'm also curious to find out any other tax laws people have found themselves caught up by so others can avoid them. Please share if you have any stories!!

Cheers

-Chris

P.S. don't worry too much about me and this property, I was making such good cash flow month to month that I'm still in the green even with the extra $300 payment (which will go down by $150 at the end of the year once the escrow account in fully backfilled).