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Monday, October 9, 2017

The Downside of Home Value Appreciation, More Property Taxes!

Last week I got my latest property tax bill in the mail, just before December's installment.  As a resident of San Diego county, I always look forward to receiving mail from Mr. Dan McAllister, our Treasurer-Tax Collector.  I'm joking, btw.  But it is a very important piece of mail because the inside stubs hold the power to take away my home if not returned paid.  When I opened the envelope and pulled out the stubs I got a nice surprise: my tax bill increased by $327.  I now have to pay $3,326 this December and turn around and do it again by April 10.  How does my $6,652.96 annual property tax bill compare to yours?

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The downsides of owning a home many times outweigh the benefits.  Case in point: You can have all of your mortgage paid off by the time you retire, but do you really ever own your home?  No!  Stop paying property taxes and your home will be taken from you, auctioned off by your county.  I'm a homeowner that chose to not have my mortgage payment include escrow amounts for property taxes.  In retrospect, I wish I had.  Now each month I have to move over money from one account to another, and have the discipline to not touch this money until it's time to write the property tax check.

The stock market's epic run continues to make headlines.  The bull is geriatric by now, but it keeps on charging.  Getting less attention is the equally bubbling real estate market.  CNBC's latest report claims that for many homeowners, property values won't recover fully until 2025.  It states that "only about one-third have surpassed their pre-recession peak value..."  I can attest to that.  Before the recession, my home was valued on Zillow (obviously not an actual appraisal) between $805K and $815K.  Today, Zillow says my home is valued somewhere between $649K and $717K, with a "Zestimate" of $683K and a one year forecast of $689K.

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My home obviously lost a butt load of value during the recession, but did I complain?  No!  Because I was able to ask (challenging my assessment) and get much lower property tax bills from 2009 until 2015.  What determines someone's property tax bill amount?  It's important to understand how they are determined so you don't get screwed.  Paying them, a la happy-go-lucky, isn't always the best course of action.  Also, watch your mail for notification of a potential property tax hike to pay for schools, roads, libraries, and so on.  If you don't want any more taxes levied on your home, vote "NO"!

Property Taxes Are Determined By:

Of course math is involved.  Taxes levied on your home = (mill rate x taxable property value) divided by 1,000.  Investopedia.com has a great article you can read to learn all about the mill rate.  For our purpose, the main thing you need to know is that you can challenge the yearly estimation, i.e., assessed value of your property.  Prevailing local real estate market conditions are used to decide a reasonable market value for your home.  It's the Assessor's job to look at all of the relevant information with respect to your property to come up with a solid assessment.  What is this information?

1.  What similar properties are selling for
2.  What the replacement costs for your property would be
3.  Maintenance costs for the property owner
4.  If any improvements were completed (ex: adding a Granny Flat or a bedroom)
5.  The amount of income you're making from the property (if any)
6.  The amount of interest charged to purchase or construct a property like yours

When you think about places like the Bay Area, and how wild property values have skyrocketed there, you can't help but also feel sorry for homeowners.  Can you imagine how much in property taxes some of these homeowners are paying within these bubble type markets?  Denver, San Francisco, Seattle, Oklahoma City, Nashville are some metropolitan locations where values have turned up, no doubt unfavorably surprising homeowners with increased property tax bills.

Are there any breaks for homeowners?

Image result for Are all of your property taxes deductible for homeowners?

Seniors, 65 and older at the beginning of the year who have owned and lived in their residence for over 10 years may be eligible for the senior property tax exemption.  Check with your county office.

Landlords who rent the property out can of course fully deduct property tax bills on a dollar for dollar basis against the rental income they collect.

Homeowners who itemize can deduct property taxes but remember not all of it can be excluded from taxation.  How much in property taxes and mortgage interest you can use to offset income taxes is based on your tax bracket.  High earners get to deduct a larger percentage than do lower income earners.  Silver linings...

For most Americans, their home is their number one asset at retirement.  They used it like a bank to save money in the form of equity.  If your property appreciates over time, as most do, you stand to gain even more when and if you sell.  Of course, in the meanwhile, you will be paying more in the form of property taxes.  In many cases, people get priced out of their homes not because they can't afford the mortgage, but rather because the property taxes have become unmanageable.  Make whatever necessary adjustments to your monthly budget ahead of time, meaning, track your property's appreciation and expect an increase in property taxes.  It's the only way you won't be surprised...like I was.

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