patrick.net

What ECBB is talking about is this.

I do remember he used to talk about 380K house and school tax thingy before. So, that made me guess he lives in somewhere in NJ. And if he live an area like tenafly NJ, he has to be little richer than just average joe. Actuall property & municiple tax there is less than 1%. That's good, right? But the kick in the head is, there's a school tax on top of it, and is 1.75%, make effective tax rate 2.68% of his property value assessed by the county.

So, let say he bought a home at 300K, and let suppose he were able to correct mistake made by the county based on previous value. His tax would be over $8000/yr for 300K home, while his mortgae would be about $1300/mo if he took 240K loan. But with this additional $670/mo cost added on top of it, he will feel like he took 380K loan for 300K home.

Too bad, man. Just get your arse outta there, come to my area where the property tax is plain simple 1.04%. If you do that, we can hang out on beer or something. My wife will kick our asses every time we do that though. But you're gonna need at least 450K for 50yrs old sub 2000 sqft house on less than 0.3 acre, 1M for 2500+ sqft on more than 1 acre.

Seaside summed up my situation fairly concisely. As my name would suggest, I don't live on the west coast. Over the years, I have lived quite a few places in and around the northeast. The places I've lived are a function of 1) jobs and 2) relative closeness of family. The high cost of living is what it is. At one point we looked ad moving down the the Raleigh Durham area, but it didn't pan out. But I digress.

...when a house is transferred, the new assessment is always the sale price. I’m not sure if this is California specific or general practice, however I’ve never seen a case where this didn’t happen.

By definition, the sale price is the real value unless there’s some shady dealing taking place.

FWIW - I have been doing some more research on this since I posted. Taxing authorities do their assessment based on "Fair market value" not the actual purchase price.

Certainly I don't mind going through the appeal process when the time comes, but given that 1) the process takes time and 2) there is no guarantee of success, I need to base my math (what I can afford) on the taxes as of today - not what they may be in the future. When I factor in the taxes the rent vs. buy shifts analysis shifts rather significantly from "buy" to "rent"

The point is not the high tax rate - that I have learned to live with it. It is the fact that with the foreclosed properties around here you are paying taxes on an inflated assessed value.

he will feel like he took 380K loan for 300K home.

sums it up nicely.

I can't help but wonder if taxes are part of the reason why many properties, even some of those that have had significant price reductions, still sit on the market for months.

EastCoastBubbleBoy says

FWIW - I have been doing some more research on this since I posted. Taxing authorities do their assessment based on “Fair market value” not the actual purchase price

Right--but by definition, fair market price is purchase price as long as it was an arms length transaction. I went through the appeals process and got my house value lowered to purchase price--was a piece of cake. Nobody even questioned me--they just changed the price as soon as I showed them the sales contract.

EastCoastBubbleBoy says

FWIW - I have been doing some more research on this since I posted. Taxing authorities do their assessment based on “Fair market value” not the actual purchase price.

Nope. Its purchase price. That is the law as Tatupu points out.

thomas.wong1986 says

EastCoastBubbleBoy says

FWIW - I have been doing some more research on this since I posted. Taxing authorities do their assessment based on “Fair market value” not the actual purchase price.

Nope. Its purchase price. That is the law as Tatupu points out.

Where ECBB lives in is not California. :)

thomas.wong1986 says

EastCoastBubbleBoy says

FWIW - I have been doing some more research on this since I posted. Taxing authorities do their assessment based on “Fair market value” not the actual purchase price.

Nope. Its purchase price. That is the law as Tatupu points out.

You're both correct. But needs clarification. The tax basis starts off from purchase price. Then every X years (as determined by the county), they will reassess the values.

Let's say I purchased a home for $500k that had a tax basis of $800k before I purchased it. The tax basis will be $500k. Next year, when the county assesses the property, it still says the property is worth $800k. It will go up but not to exceed X percent of its existing assessment (I don't know that percentage). I'm assuming this limit is governed by prop 13.

So as you can see, the higher the price is currently is, the higher the potential increase per year. Those that bought in 1960's or 70's for a price of for example, $40k; the X percent limit in increase of property taxes (assessments) protects them. 2% of 40k is a lot less than 2% of $500k.

Yes, California is totally different than any other state with regards to taxes. Every state is radically different than others. It's completely ridiculous to generalize about property taxes in one state based on your experiences in another. For so many smart people, you guys sure seem to be ignorant about some things....

Vain says

Let’s say I purchased a home for $500k that had a tax basis of $800k before I purchased it. The tax basis will be $500k. Next year, when the county assesses the property, it still says the property is worth $800k. It will go up but not to exceed X percent of its existing assessment (I don’t know that percentage). I’m assuming this limit is governed by prop 13.
So as you can see, the higher the price is currently is, the higher the potential increase per year. Those that bought in 1960’s or 70’s for a price of for example, $40k; the X percent limit in increase of property taxes (assessments) protects them. 2% of 40k is a lot less than 2% of $500k.

Section 1. (a) The maximum amount of any ad valorem tax on real property shall not exceed one percent (1%) of the full cash value of such property. The one percent (1%) tax to be collected by the counties and apportioned according to law to the districts within the counties.

The proposition lowered property taxes by rolling back property values to their 1975 value and restricted annual increases in assessed value of real property to an inflation factor, not to exceed 2% per year. It also prohibited reassessment of a new base year value except upon (a) change in ownership or (b) completion of new construction.

Vain says

Let’s say I purchased a home for $500k that had a tax basis of $800k before I purchased it. The tax basis will be $500k. Next year, when the county assesses the property, it still says the property is worth $800k.

The $800K would be an error on the county records. Dont assume they keep their records up to date. California and many counties have terrible IT systems and staffing issues. You need to get that corrected. You may get all sorts of push back the minute you walk in the door, but you need to persist on getting the county personel to correct their records and get confirmation they have corrected your property tax records. Both the state and counties for decades have sunk hundreds of millions of dollars to get their IT systems up to date but have failed countless times.

Thanks guys... if I ever move the CA I know where to go for tax advice.

My point is that at the end of the day, the taxes are making homes that would otherwise be a relative bargain, anything but.

Tude says

Yes, California is totally different than any other state with regards to taxes. Every state is radically different than others. It’s completely ridiculous to generalize about property taxes in one state based on your experiences in another. For so many smart people, you guys sure seem to be ignorant about some things….

I don't live in CA. And fair market price is ALWAYS purchase price regardless of what state you live in--as long as it's an arms length transaction. If you buy a house that's listed on the MLS, then by definition, you paid the fair market price. Talk about ignorant....

Actually, in the Virginia city where I live, fair market price is NOT the purchase price. Fair market price is what the City tax assessor decides is the fair market price.

Example: a home sold for $750,000 in our neighborhood. Sold to developers. The price, as far as I'm concerned, was fair market value. However, most similar properties are still sitting on the market, month after month, listed at $900,000+ The buyers sold it themselves and saved the commission. Could they have sold with an agent at $800K? Maybe, but they saved all the hassle of listings and showings . . . and walked with the same amt of cash.

Most recent City assessment, one year after the sale, $775,000. The City still believes it's worth more than the sale price. I'm sure the developers fought it . . . in fact, it was probably more, but they got it down to $775K.

Happens all the time here. I mean, if I sell my home due to distress, for 1/2 what everyone else is selling their home . . . do you really think the City is going to assess fair market value at the sale price? no way

beachchairVB says

Happens all the time here. I mean, if I sell my home due to distress, for 1/2 what everyone else is selling their home . . . do you really think the City is going to assess fair market value at the sale price? no way

Sorry edited. I just reread what you wrote. Yes-cities will take a hard look at foreclosures and distressed sales. They will argue that those sales aren't fair market.

That's what I'm up against the only "bargins" (I use that term loosely) are short sales and foreclosures. The few "normal" sellers tend to price their homes above what the market will bear, which is why they sit unsold for months, if not years.

Tax value and market value have very little in common, at least in Miami, FL. For example, the house I live in i purchased for $109K but the tax value is $232K. Yes, it was a foreclosure and it sat on the market for 6 month and several price reductions. Still, since it was a foreclosure it is not considered a "regular transaction" by the tax assesor. In this n'hood more than half of all transactions are either short sales or foreclosures.

Ironic, and honestly funny that they (all those in their own mind millionaires from the great smoke and mirror property value ideas they had fantasized into their heads) all laughed at those with the intelligence to stay away from this bullshit and rented. Didn't they? Now as the renters who never got involved in buying, selling, flipping, refinancing, are the ones without the tax responsibility or the 500K or 1M loan debt on their backs for crack houses worth half or soon less. Who is laughing now?

Simple observation: If the tax difference between "fair market" and "paid" are enough to make the purchase decision between renting and buying complicated, that's enough to ask whether it's really a right time to buy to begin with!

The only financial reason to buy is to save money, significant amounts of money. If the difference between buying and renting isn't significant, then you are not gaining anything financially while giving up the option to move or buy at a lower price later.

Unless... we want to believe that real estate ALWAYS goes up of course!

rob918 says

He said that the entities in NY send him a different bill for schools, fire dept., water, bonds, state, city, county…..it’s enough to make my head spin when he’s telling me this.

This is correct.

And even though they know about the additional fees, 99%+ of the the Realtwhores in NY only post the basic County tax on a listing. They very seldom divulge the Village, local fees and taxes, let alone give the buyer a heads up about all the extras. They much prefer to let the lawyers and banks ferret out all the charges down the road and deliver the bad news.

I'd assume buyers in NY would know to ask for totals, but some don't.

Just to add: some townships will fold local charges, like Incorporated Village, library, fire, etc. into the town tax bill, itemizing each. it depends on the area.

tatupu70 says

Tude says

Yes, California is totally different than any other state with regards to taxes. Every state is radically different than others. It’s completely ridiculous to generalize about property taxes in one state based on your experiences in another. For so many smart people, you guys sure seem to be ignorant about some things….

I don’t live in CA. And fair market price is ALWAYS purchase price regardless of what state you live in–as long as it’s an arms length transaction. If you buy a house that’s listed on the MLS, then by definition, you paid the fair market price. Talk about ignorant….

I am not ignorant, we are talking about TAXES. All states calculate property taxes differently, one cannot generalize. Not all states calculate even based on "fair market value", and not all states determine "fair market value" based on sales price. In some states "taxable value" can be half what one pays, in others taxable value can be double. Once again we are talking about TAXES, not what or what isn't fair market value.

This may be a tad off topic, but I don't really understand how proposition 13 works. As far as I understand the property tax is limited to 1%, however my property is in Oakland and we pay 1.4%. How can Oakland add on .4 additional percent? It used to be 1.3% but they raised it again last year. Now you may not think .4% is a big deal, but when you are a relatively new buyer with these ridiculous prices, its HUGE! I'd be paying considerably less in taxes if my property were located in San Francisco where the rate is closer to 1%. (plus I'd feel better because giving money to Oakland feels like throwing it away with the governance there =/ )

Can someone explain to me how this works exactly? Also as to the original post I completely agree. Property tax here is ridiculously high if you bought your property in the late ninties++ and makes the purchase not worth it.

Tude says

I am not ignorant, we are talking about TAXES. All states calculate property taxes differently, one cannot generalize. Not all states calculate even based on “fair market value”, and not all states determine “fair market value” based on sales price. In some states “taxable value” can be half what one pays, in others taxable value can be double. Once again we are talking about TAXES, not what or what isn’t fair market value.

I'm sure you're not ignorant--I said that in jest because you implied the same of me in your previous post. You may be talking about TAXES, but I wasn't. I was only pointing out that if your TAXES are based on fair market value, then that value should be the same as the purchase price--if it's an arms length transaction. This is important because the best way to lower your TAX bill is to appeal the taxable value of your home....

When you purchase a place the property taxes are based on the new buyer's sale price of the house, not the old price. In California a good rule of thumb is 1.2% of purchase price for the new taxes.

leeandshelley says

When you purchase a place the property taxes are based on the new buyer’s sale price of the house, not the old price. In California a good rule of thumb is 1.2% of purchase price for the new taxes.

This should read
IN CALIFORNIA When you purchase a place the property taxes are based on the new buyer’s sale price of the house, not the old price

Some of you guys are driving me nuts...

Tude says

This should read
IN CALIFORNIA When you purchase a place the property taxes are based on the new buyer’s sale price of the house, not the old price

It's the case in every state I've ever lived in. Do you know of somewhere where they don't use fair market value for their tax basis?

In the states I have lived in, assessed value need not equal fair market value, and fair market value need not reflect purchase price.

For the sake of argument, lets assume that assessed value = fair market value and the annual tax rate, accounting for all taxes (property, school tax, etc) works out to be equivalent to 2% of the purchase price.

Thus:

Assessed value in 2008: $450k --> Tax: $ 9000
Assessed value in 2009: $400k -->Tax: $8000
Purchase price in 2010: 280k [REO property]

New assessed value upon appeal: ???

If the assessed value were equal to the purchase value no problem, taxes would be: $5600.

BUT

Assessor has flexibility based on "market conditions".
It's kind of like the Realtor finding comps for an area.

So they could argue that "the sale was distressed; we just reassessed the house last year" etc.

Worse case, the tax bill holds at $8000.

($8000 - $5600) /12 = $200 a month difference.

So although there are "bargains" out there, the discount in purchase price is off-set by the lack of a commensurate decrease in taxes.

I live in NY (Long Island to be specific) and I completely agree with ECBB. A mortgage payment here is 1/3 taxes. Even if you go out and buy a 300k house with cash, it will still cost you 600-700 dollars a month in taxes to live there! Add in utilities and such, you are looking at 1k a month in costs for a house with no mortgage!!!! That is absolutely outrageous. In my opinion, you never truly own anything in this stupid state...you just rent from the govt.
There are 2 major issues with grieving your property taxes in this area right now.
1st prob is that a grievance is based on sales of previous year comparable sales in your area. So it doesn't matter what you paid, it matters what other people paid in your neighborhood for a similar house....LAST YEAR. In a falling market, last year is still more than what you paid. Unless of course you paid more, in which case they'll gladly tax you at the purchase price.
2nd prob - many townships have simply adjusted their tax rate upwards to compensate for the falling prices. I know this because I have a friend that works at the biggest tax grievance service on LI. They said they are having more grievances rejected this year because of this. Your assessed value dropped? Oops, looks like the rate when up. No reduction for you.
It's most likely because the state, and most govt entities in NY, are broke. If they reduce everyone's taxes, that's even less revenue they'll have. God forbid they trim the fat in their budgets.
The other problem with this tax situation is that it also inflates local rents. Higher taxes bumps up a landlords break even price. Thats why renting around here is also ridiculously expensive. Renting is generally the better option, but it's like choosing between getting smacked in the face or getting stabbed in the leg. Being stabbed in the leg sounds awful, so I guess I'll let you smack me in the face.

ECBB... you of course are correct on the RE tax concern.

This shows how little folks in CA know about the rest of the US... almost no state values RE for taxes like CA does and yet they are convinced the rest of US does it the really ridiculous CA way.

I know,,, if you are long term homeowner in CA you get an enormous break on your taxes... if you paid $50K and the recent buyers paid $500K next door for a similar home your taxes are probably 20% of what the new neighbors are paying. No wonder your state is in such a mess... taxes need to be fair not totally unfair... and now that huge disparity is a large part of why your RE market is so bad...

In NH all houses are assessed every 3-5 years and taxes are based on comparable current market value... so we all pay a fair poroprtionate share... no one likes paying taxes but we do not feel like we need to be careful when we sit down because we have taken it in the rear from the local assessor...

Agreed. My brother in law used to be an assistant assessor in NH. He'd go out, take pictures of the property and report (as best as he could tell) the condition they were in, and if the overall size of the house and associated outbuildings matched the property card.

But whth prices falling so fast, and municipalies resistant to doing revals more than necessary, the taxes lag well behind the sale prices.

ECBB: in NH we have not seen large price reductions... down maybe 10% since 2004-2005 peak... but then again prices in Northern NE (southern NH and Portland ME excepted) did not rise precipitiously from 1999 to 2005... up maybe 30-40% in general.

I do not mind if there's a lag in valuation assessment... we are all still being taxed over the same overall tax base... so when valuations fall taxes rise as a % and we only see the typical 2-3% annual increase in what we pay. That is sustainable. And we pay right around 1% of current value now in my town.

Last really comprehensive (pictures, house footprints, etc.) was done in 2005 (we had a less detailed one in 2009)... in 2005 you could go on-line and see any house in town you wanted... it was very helpful and was to me very much on the up and up. Even gave an assessment of the land (everyone has 5 acres plus in my area) so you could see how the true lay of the land is... folks with wet areas/wetlands had a significant discount as well they should... ditto steep slopes. But if you have a view and/or waterfront... man did you get slapped... we were fortunate... the far back of our land is a level bluff that has a mountain and waterview... but that's a good 600' from our house and thus did not factor in our land valuation.

RealisticOptimist says

2nd prob - many townships have simply adjusted their tax rate upwards to compensate for the falling prices. I know this because I have a friend that works at the biggest tax grievance service on LI. They said they are having more grievances rejected this year because of this. Your assessed value dropped? Oops, looks like the rate when up. No reduction for you.

This isn't true. In New Jersey, by law all property in the township must be reassessed every 10 years. In my township, the property reassessment occurred last year and my property taxes dropped by more than $600 a year. The tax rate is based on what the operating cost is to run the township, i.e. the budget. Than all the property values are added up and a tax rate is set based on what they need to run the local government, county government and the school budget. When they reassessed my property, the value of the property went up, but this was offset by the tax rate going down. While it's true when prices are going up and you buy, they use your purchase price for a bases for your assessed value. Actually they are using the assessed value that was submitted by the appraiser to the bank, but since these were highly inflated anyway, during the bubble years, they hurt you. Now if you brought a house say in 2001 right after they assessed the properties then, you would be paying a much lower tax rate than people who purchased in say 2006 where priced and assessed values skyrocketed.

So a township wide reassessment isn't good for people that haven't been paying there fair share, it's great for people that are paying too much. If the township never reassessed the properties, people who purchased in 1930 would be paying 10 bucks a year in taxes and other more recent purchasers would be paying $10,000.

klarek says

The problem is NOT the assessed value. It’s the multiple attached to it. Think about it: prices went up 250% over less than ten years. The local municipalities’ revenues from property taxes went up accordingly. Where did that money go? When prices fell, they raised the multiple to keep revenues high. It’s criminal.

Where did all the money go? I'm sure if you looked at existing home sales, they would only be a small percentage of the houses that changed hands (and thus higher assessments) during that time period, the lion share of the sales were new houses in new developments. So where did the extra tax money go? More people = more services required, additional police officers, more road department workers, sanitation, etc and more children which = more schools. Expanding the tax base by adding houses really isn't feasible in the long run, cause of all the expenses that go along with them. Commercial / Industrial is where communities can really get ahead in the tax game. They require far fewer services and add more to the tax base.

cevansnh says

ECBB… you of course are correct on the RE tax concern.
This shows how little folks in CA know about the rest of the US… almost no state values RE for taxes like CA does and yet they are convinced the rest of US does it the really ridiculous CA way.

Yes I know, I am a Californian in California and am a little bit embarrassed by the posts.

I have lived and shopped for homes all over the country, I did research about property taxes when I was considering relocation. Property taxes vary by state wildly. When I was considering a move to Charlotte, NC I started looking at homes in South Carolina as just right across the boarder you could save thousands a year in property taxes on the same property as far as purchase price.

One really needs to research property taxes before you buy. Even within CA it can vary wildly my city and county due to the "extras" and sometimes mello roos. I am lucky enough to live in an unincorporated area, my property taxes are more than 1000 a year less than my friend who lives a few blocks away and whose home is assessed at about the same price (but she lives in incorporated Richmond).

I'm confused by Tude and cavansnh's posts. What exactly was misrepresented here?

Of course property tax RATES vary by locality. Has anyone here said otherwise?

And yes, home owners may disagree with the assessed value of their house. Unfortunately, determining fair market value is a difficult endeavor--5 people who try it will likely come up with 5 different answers. But just because you don't agree with that number doesn't mean it's not nominally based on fair market value. It just means that you disagree with the process for how they arrived at that number. And that's what the appeal process is for.

Finally--I strongly disagree with anyone who says that you would lose an appeal of assessed value if you just bought a new place at a lower price and want to lower the asssessed value. As long as it was a normal sale, listed on MLS, and is an arms length transaction, you will win.

cevansnh says

I know,,, if you are long term homeowner in CA you get an enormous break on your taxes… if you paid $50K and the recent buyers paid $500K next door for a similar home your taxes are probably 20% of what the new neighbors are paying. No wonder your state is in such a mess… taxes need to be fair not totally unfair… and now that huge disparity is a large part of why your RE market is so bad…

No! you have it backwards. The problem isnt the property tax, Its the inflated bubble prices idiot buyers paid on homes. First buyer paid 200-300K in mid 90s and the second buyer, next door, paid 2-3x more in the following 5 years during the bubble. Now we have the second buyer screaming they are paying unfair prop tax. These are the same, out of state buyers who kept saying there was no bubble and prices were infact justified. Its gets down to their own ignorance and vanity.

Just ask... well why did you overpay to begin with? More important question is why should other pre-bubble homeowners pay more prop tax because that same idiot buyer?

A friend told me that if you ask for your property taxes to be reassessed downwards because of a lower value of the house, you lose Prop 13 protection, so your property taxes would be assessed with the market value in future (not by the 2% limit upwards). Is this true?

One more question related to this post. Patrick's formula of dividing annual rent by 3, 6, and 9% to determine whether a property is fairly priced---is this based on a formula that considers mortgages at 6%, or is it something else? Interest rates are now 4.5-4.75% now. Would you then divide annual rent by this amount now, and not 6%?

Waitingtobuy says

with the market value in future

no its fixed on sales price. The relief granted is only for a temporary time period, such as a during a recession. Then it goes back to prior assessed values (purch price).

Thanks Thomas.

Any idea on Patrick's formula...what is he basing the 3, 6, and 9% on? Patrick?

What property tax rates do different people pay as of 2011? Curious.
(I know they are lower rates in Japan than in the US ... I'll check).