Understanding Your Property Tax
Many property owners have quickly discovered that real estate taxes and special assessments are the truly unavoidable cost of real estate. States, counties, cities, towns, villages, sanitary districts, school districts, park districts and many other taxation authorities depend on real estate taxes for their operating revenue. Because real estate taxes are so common and accepted, many property owners and most homeowners seldom take the time to understand how real estate taxes work. More importantly, too many property owners fail to understand how they can use the system for their optimum benefit, either to make improvements that will increase the value of their properties or to challenge the taxes they are being required to pay. This article will dissect the real estate tax, as well as its offshoot, the special assessment, into four elements Go to next segment Types of Real Estate Taxes and Assessments The Real Estate Taxes and Assessments article contains the following segments
The real estate taxes assessed by the local taxing authority have primary lien on the property. This primary lien means that they are the first to be paid from any sale of the property. 1. Property owner does not pay real estate taxes. For more information about property taxes, please review the Real Estate Taxes and Special Assessments article.
I You fail to pay property taxes, fall behind on home owners insurance payments, and or maintain the home (although this rarely happens). You will also be held accountable for repayment if you neglect your home. This isn't a subjective matter, where one person thinks your creaky staircase is unacceptable and another would let it slide. These are serious problems, like a hole in your roof or a backed-up sewer line. This requirement also includes keeping up with your property taxes and insurance, which are necessities for any homeowner. If your lender estimates that you'll keep your loan for 10 years and makes payments to you reflecting that timeframe, you may think you have to start paying back the loan after 10 years. In fact, as long as you continue to pay your property taxes and keep up the home in good condition the lender can never demand payment from you until you no longer live at that address.
Some processors are responsible for ordering the home appraisal, although many originators take that task upon themselves (see Chapter 10 for more on the appraisal). They may also make sure that you have homeowner's insurance, are up-to-date on your property taxes, and get any other loan requirements out of the way before the loan leaves their desk.
If the property needs fix-up work, the lender may accept offers at deep discounts from market value. Just as important, prior to closing the sale of their REOs, lenders normally clean up title problems, evict unauthorized occupants, and bring past-due property tax payments and assessments up to date. Some lenders permit buyers to write offers subject to appraisal and professional inspection.
Doesn't severely raise eyebrows, the property passes the appraisal test. Although appraisals based on statistical modeling have long been used by property tax assessors, they do not adequately substitute for close, detailed property appraisals performed by a competent and disinterested expert.
A tool used by local and state governments to focus additional investment dollars for a target area. When an area is designated a TIF district, the local taxing authority will determine the tax revenue that the target area currently generates for the city, county, state and other entities. Any future tax income above that annual level that is generated from that area during the life of the TIF designation will stay in that area. That anticipated additional tax revenue can be used to improve local infrastructure, finance investments or reimburse investors. Note that tax rates are not increased, the increased revenue will come from the added business that investments will bring to that area. For more information, see the Real Estate Taxes and Special Assessments article in the Real Estate In-Depth section.
If you need a mortgage, you must purchase title insurance because all mortgage lenders require it, for an amount equal to the loan. It lasts until the loan is repaid. As with mortgage insurance, you pay the premium, which is a single-payment made upfront. Title insurance protects against loss arising from problems connected to the title to your property. Before you purchased your home, it may have gone through several ownership changes, and the land on which it stands went through many more. There may be a weak link at any point in that chain that could emerge to cause trouble. For example, someone along the way may have forged a signature in transferring title. Or there may be unpaid real estate taxes or other liens. Title insurance covers the insured party for any claims and legal fees that arise out of such problems.
Both depository and nondepository loan originators underwrite and fund loan production. However, once the loan is closed, an infrastructure is required for collecting and accounting for principal and interest payments, remitting property taxes, dealing with delinquent borrowers, and managing foreclosures. Entities that provide this operational aspect of mortgage lending are referred to as servicers. As part of providing these services, such entities receive a fee, which generally is part of the monthly interest payment. While many originators also act as ser-vicers, servicing as a business is both labor- and data-intensive. As a result, large servicing operations reap the benefit of economies of scale and may explain the significant consolidation in this industry over the last decade. As a point of comparison, the top 10 servicers comprised 55 of the market at the end of 2004, compared with 21 at the end of 1994.7
A homeowner's housing-related payments (including principal, interest, real estate taxes, and home insurance payments) by gross income. A back-end ratio divides total monthly debt payments (including housing-related payments plus all credit card and automobile debt, as well as child payments and other long-term obligations) by gross income.
For example, the borrower may be required to establish an escrow account at the time of the closing. The borrower will normally have to escrow two or three months of insurance and real estate tax payments into the escrow account. Also, the borrower must purchase a full year's property insurance coverage prior to the closing.
Housing demand has been typically analysed by treating housing as an asset (Poterba 1984). In this approach the demand for housing is based upon the user cost of owner occupation. User cost reflects the theoretical models discussed above it is the marginal rate of substitution between housing and non-housing consumption. This measure gives the amount of non-housing consumption forgone for a one-unit increase in the consumption of housing services. The trade off reflects mortgage costs, forgone rates of return on housing equity and expected capital gains on residential property, and would also have depreciation and property taxes as arguments. Thus user cost reflects both consumption and investment aspects of housing choices.12 The theory implies that mortgage demand equations should either have user cost arguments in the specification, or such
In general, the lender assesses the adequacy of the borrower's income in terms of two ratios that have become standard in the trade. The first is called the housing expense ratio. It is the sum of the monthly mortgage payment including mortgage insurance, property taxes, and hazard insurance, divided by the borrower's monthly income. The second is called the total expense ratio. It is the same, except that the numerator includes the borrower's existing debt service obligations. For each of their loan programs, lenders set maximums for these ratios, such as 28 and 36 , which the actual ratios must not exceed.
The total of depreciation that has been claimed on a property. Owners of investment real estate must claim depreciation deductions on their annual tax returns for the investment property. When the property is sold, the accrued depreciation deductions must be reclaimed and taxes must be paid on the accrued depreciation . For more information, see the depreciation entry or the Investment Property Tax Advantages Depreciation Deductions article in the Real Estate Investing section.
The servicing agent is the entity that receives the mortgage payment, keeps the payment records, provides borrowers with account statements, imposes late charges when the payment is late, and pursues delinquent borrowers. In many transactions, servicing agents also pay property taxes and insurance with money placed in escrow by the borrower.
The budget constraints applied in this case are similar to those presented for the model with certainty, except considerably more complex. In the interest of exposition and comparison tax arguments (e.g. property tax) are excluded from the equation. The budget constraint for the first period of the two-period model is expressed in terms of initial wealth w, income y and the mortgage payment m this is given by equation (2.6). The budget constraint for the second period is expressed in terms of final period wealth W and is given by equation (2.7). The novelty is the appearance of a risky financial asset A, to provide a competing investment for housing. The argument rA is the expected return on the alternative asset, and ry is the expected growth in income. Expression (2.8) is the variance of final wealth.
Tx property taxes Recall that monthly payments may include items other than principal and interest, such as property insurance, HOA fees, mortgage insurance, and so forth. As a starting point, estimate the amount you will pay for each monthly expense. Next, back out only the amounts for interest and property taxes.5 For example, if your total monthly payment of 1,600 includes every item in the list, interest and property taxes might give you a deduction of only 1,200 per month, not 1,600 per month. This amount is all you can deduct (12 x 1,200 14,400 as opposed to 19,200). Once you estimate your future interest and property tax figures, pull out your most recent tax returns. Recompute your income taxes with these amounts as deductions. But here's the catch To deduct property taxes and interest, you must give up the standard deduction of 7,950 for married couples ( 4,750 for individuals filing separately). Plan to Close in January or February. If you do not currently itemize income tax...
Nearly all lenders require low-down-payment borrowers to pay homeowners insurance premiums, HOA fees, and property tax payments into Discounts and late fees Your insurer, property tax office, or HOA may offer discounts for early payment and assess late fees against tardy debtors. At present, no law requires lenders to pay your bills according to a time schedule that guarantees you the available discounts. When the lender snoozes, you lose. Until proposed federal
The sale--usually through public auction--of properties that have not paid delinquent property taxes. Most local taxing authorities assure themselves of property tax revenue by selling delinquent property taxes to investors. These investors or the taxing authority can then exercise their rights to foreclose on the property. However, property owners may be able to rescue their homes by exercising their equitable or statutory rights of redemption. For more information, see the Buying Tax Sale Properties article in the Creative Financing section.
For example, Acme Personal Services leases office space in a multi-tenant building. The 2,000 square feet of office space it rents is 15 of the total leasable space in the building, which is now completely occupied. Acme's triple-net lease charges them 6 per square foot per year, plus 15 of the CAM, property taxes and insurance (charged quarterly). So, Acme's base rent is 12,000 per year (or 1,000 per month) and every quarter, it receives an additional bill for its portion of the CAM, real estate tax and insurance.
For example, on a 100,000 loan at 10 interest, your monthly payment would be about 1,075 for a 15-year loan term, compared to 875 for the 30-year loan. However, the 200 difference in the monthly payment saves you over 120,000 in total interest. (These figures do not take into account any payments you would have to make each month to be put into escrow for property taxes and insurance.)
A standard term for the real estate tax of a specific parcel of property. As the name suggests, this tax is based on the valuation of the property. The traditional method for calculating a parcel's property tax assessment is to multiply the assessed value after any adjustments or deductions for homestead owners, senior citizens, etc. by the official tax millage rate and any equalizer rate. For more information, please see the Real Estate Taxes & Special Assessments article in the Real Estate In-Depth section.
Revenue or income generated from a person's direct effort or investor's active participation in a business' operations. Salary and wages from regular employment or self-employment are primary examples of active income. This label comes into play in discussions about Tax Shelters, which contrasts active income with portfolio and passive income, which are the three types of ordinary income. For more information, see the Investment Property Tax Advantages article in the Real Estate Investing section.
Investments or maneuvers that can produce opportunities to lower income or capital gains taxes. Changes to the tax codes have severely hampered most tax shelters. Previously, paper losses from real estate investments could be used to offset taxable personal income. No longer. The IRS now distinguishes between passive and active income losses from passive income such as most real estate investments can only be offset against other passive income. Passive income losses cannot be offset against active income. For more information, see the Investment Property Tax Advantages Deducting Losses and Depreciation article in the Real Estate Investing section.
Under standard actual cash value coverage, insurance policies will deduct depreciation from original cost when calculating reimbursements. For tax deduction purposes, however, depreciation can only be taken on property used in a business, trade or income generation. Personal residences cannot claim depreciation deductions. Depreciation deductions can be calculated with either the straight line method or accelerated cost recovery system. For more information, see the Deducting Depreciation and Investment Property Tax Advantages articles in the Real Estate Investing section.
An additional real estate tax assessed toward a portion of the entire taxable community by a local tax authority for a special project. Special assessments are normally used to cover specific improvements, such as street improvements, commercial development or the creation of special amenities (such as zoos and museums) that is meant to benefit only a portion of the community. For more information, see the Real Estate Taxes and Special Assessments article in the Real Estate In-Depth section.
Lenders and property buyers have the same concern with regard to the title. They want to make sure that it is clean and defect-free, or at least reasonably clear. Mortgage lenders and property buyers will seek to avoid all encumbrances that may affect their interest in the title. The first mortgage lender wants to be sure that it has the first lien position (after the real estate taxes) on the title the second mortgage lender wants to ensure that it has the second lien position.
Revenue or income from investments in which the individual investor does not actively or materially participate. Limited partnerships and real estate investments are considered passive. Passive income losses cannot be used against active income. Real estate losses are always considered passive income losses but they may be deducted against active income if the individual actively participated in at least the management decisions and personal active income is less than 150,000. Contrast this with active income and portfolio income, which are other forms of taxable ordinary income. For more information, see the Investment Property Tax Advantages Deducting Losses article in the Real Estate Investing section.
The housing-related charges that the home owner must anticipate and pay. Total housing expenses normally include the principal and interest payments on the mortgage loan, plus any homeowner's insurance, mortgage insurance and property tax charges. See also PITI entry. For more information, see the Monthly Payments article in the Homebuyer Guide section.
1 You stop paying your property taxes. You're required to continue all of your regular city or state property taxes while receiving your reverse mortgage funds. An easy way to make sure this happens (forgetfulness is a common trait among reverse mortgage borrowers) is to let the lenders take care of this for you. You have the option to have your property taxes taken straight out of your loan and paid by the lender use this feature if you think paying property taxes may slip your mind. investment (so you can see why they'd be sticklers about this). Along with your property tax, you can elect to let the lender take over your homeowner's insurance payments. It's a good way to make sure you never fall behind.
I The bank will never take your parents' home. Throughout this book we repeat one of the most important facets of the reverse mortgage The bank lender has no authority to take your parents' home away. None. Nada. Zilch. Zip. The home is your parents' and no one else's. This myth stems from the fact that many people choose to sell their homes in order to pay back the loan when they move out (or their heirs sell it when parents die). Lenders can demand loan payment in full if your parents fail to hold up their end of the bargain (paying their property taxes and keeping up home maintenance), but this happens so rarely, it's almost not worth mentioning. Even so, they still can't seize the home. Your parents are secure in their home, which remains theirs until they want to sell.
Where To Download Property Tax Consulting Course
Property Tax Consulting Course will be instantly available for you to download right after your purchase. No shipping fees, no delays, no waiting to get started.