Property taxes in regards to investment property

[Brandon Gamblin]

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?

[Jon Holdman]

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.