This article was reprinted with permission from NerdWallet.
You are a typical homeowner. You worry about the noises behind walls, enjoy the smell of your yard after a storm and follow your home's rising value.
This buoyant feeling might turn to a sinking feeling when you get a property tax bill. Property tax will likely rise as the value of your home increases.
Depending on where you live, the magnitude and timing will differ. Some states like New York and New Jersey could see their property tax obligations rise quickly. Even states like Texas and California that have a ban on year-over year increases can see tax increases of hundreds upon years.
Taxes might rise faster than values
The rapid rise in house prices means that property tax bills may not always keep up with the house price growth. Lee Pierce, senior vice-president of lending at Seattle Credit Union, stated in an email that "an increase in value doesn't necessarily mean that next year's properties taxes will rise at a proportionate pace."
This is good news for those who own typical homes. According to the National Association of Realtors, the median sale price of an existing house rose 12.6% in 2020 and increased 13.3% over the twelve months ending in September 2021.
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Assessed values may be lower than cap rates sometimes
Many state and local governments claim that they control tax bills by lowering assessed values. According to the Tax Foundation, an organization that focuses on tax policy, the District of Columbia and 18 other states, including California, Texas, and Florida, limit the amount property tax assessments can rise each fiscal year. According to the Lincoln Institute of Land Policy (a think tank that studies land use, stewardship, and taxation), New York City and Nassau County on Long Island also restrict assessed value increases.
However, the protection provided by caps varies in degree. The Lincoln Institute states that the assessed value of property can rise by no more than 2% per year in California, Florida, and Texas. It can also go up by as much as 3% per year in Florida, Florida, and 10% in Texas.
Despite the limitations imposed by states, local governments are able to increase homeowners' taxes bills. According to U.S. Census data, Marin County's median real estate tax on a property increased by 9% between 2018 and 2019, to $8.103.
Tax rules can make it difficult for owners to move.
Limiting increases in assessed value is a problem. They can prevent people from upgrading or downsizing, and cause neighboring houses to have divergent tax bills for similar properties. California is an example.
The tax bill for a Golden State home is almost always higher than the home's actual value. The assessed value of your home will be adjusted to reflect its true market value when it is sold. You could pay more tax than you actually paid.
It creates a situation in which newcomers subsidise the older-timers by paying a higher tax share for recent home buyers than they do for long-time homeowners. It's theoretically disincentive to someone buying your house, even if it seems fair.
You might also have second thoughts about moving because you could be paying significantly more property taxes on your new home.
In a 2018 paper, Jared Walczak (Vice President of State Projects at the Tax Foundation) stated that moving from one house to another requires you to give up preferential tax treatment. This is usually done over years of undervaluation.
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How to monitor your taxes
States can limit property tax collection growth by using other methods than restricting assessments. Some stop local governments from raising millage rates (the tax that is paid for each $1,000 of taxable property value) and others limit growth in total tax revenues.
Although many states offer protection to homeowners against unexpected jolts in their property tax bills, it is possible that you could still be subject to an increase that eats into your budget. There are several ways you can prepare.
The loan servicer will send an escrow disclosure each year to anyone who pays property taxes through an escrow bank on a mortgage. The statement will include the estimated annual cost of homeowners insurance, mortgage insurance, and property taxes. This statement may include a breakdown of last years escrow payments, including property tax paid, and projections for next year.
You will be responsible for any difference if your servicer fails to pay your tax bill in full. To avoid any shortfalls, you can instruct the servicer to withhold additional monthly, Jeffrey Wood, a certified financial accountant, investment advisor and partner at Lift Financial in South Jordan, Utah wrote in an email.
The county tax assessor will inform you about your tax bill. Sometimes, it can be months ahead. You can either receive the information in a letter or visit the website of your tax assessor.
You'll find your tax amounts this year and the last year if you search for phrases like "total tax" and "levy due". This will allow you to calculate how much more taxes you'll have to pay.
You can't let your joy about the rising value of your home and its tax laws get in the way of your luck.
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Holden Lewis writes about NerdWallet. Email: hlewis@nerdwallet.com. Twitter: @HoldenL
