Aug 17, 2023 9 min read

Understanding Changes in Property Taxes After Buying a House

When you buy a house, you should never expect to pay the same property taxes as the previous owner. Property tax bills typically increase over time, and major increases can trigger at a change in ownership.

Understanding Property Taxes

Property taxes are levies that homeowners need to pay annually to local government or municipal entities. These taxes serve as an essential source of revenue for local governments, supporting public services such as schools, libraries, road maintenance, emergency services, and recreational facilities.

The basis for property tax calculation is typically the assessed value of a property including land and structures. The local tax assessor evaluates the property’s value using historical sales data of comparable homes, current market trends, features of the property, and the cost of replacing the property.

Thereafter, the assessed value of the property is multiplied by the local tax rate or mill levy to determine the amount of tax due for the year. Mill levies are generally expressed in terms of mills per dollar, where one mill represents one tenth of a cent. For example, a mill rate of 20 mills would equate to a property tax rate of 2% of the assessed home value.

It’s important to note that rates and assessment methods can vary significantly from one location to another. Some states calculate property tax based on the full market value, while others use a percentage of the market value. There are also nationwide differences with regard to who constitutes a tax assessor, the frequency of property assessments, and the level of government that manages these assessments.

Property Taxes and New Home Purchases

When you buy a house, it’s crucial to remember that property taxes could change. This change occurs for a few reasons:

Reassessment: Once the property is sold, the tax assessor will likely reassess the home’s value, and this could result in a higher assessed value than the previous assessment due to appreciation over time or property improvements. Consequently, the tax due may increase.
Changes in Tax Rates: If the local government decides to increase the mill levy or tax rate, this could also result in a higher property tax bill, regardless of whether the home’s value has increased or not.
Removal of Exemptions: If the previous owner was benefiting from any tax exemptions or discounts (for example, for elderly or disabled residents), these would likely be removed when the property is sold, potentially resulting in a higher tax bill for the new owner.

To understand what your property tax commitment will be as a new homeowner, it’s important to investigate current and proposed tax rates, potential changes in home value, and any applicable tax exemptions or benefits in the area you plan to buy. The actual purchase price of the house may serve as an indicator, but it may not reflect the current market value that is used for the basis of tax calculation, thus, for an accurate estimation, consulting with a local tax assessor or a real estate professional is advised.

Property Tax Payment

Once you buy a house, you’ll typically need to pay property taxes yearly. However, some areas allow payments in installments. It’s common for mortgage-paying homeowners to incorporate their property tax payments into their monthly mortgage dues. This arrangement is often facilitated through an escrow account set up by your lender when you secure a mortgage.

It’s critical to understand that failing to meet your property tax obligations can result in penalties and the establishment of a tax lien on your property. Should this happen, it may ignite a foreclosure process. That’s why it’s essential to comprehend the scope of property tax payments when considering homeownership.

The Real Estate Purchase Process

Understanding Property Taxes

Property taxes are yearly financial obligations that homeowners need to remit to their local municipal or government authorities. They’re typically calculated based on your property’s estimated market value and the tax rate that your local jurisdiction imposes. You can generally expect to set aside close to 1% to 1.5% of your property’s value annually for these taxes. However, the rates can differ significantly based on your geographic location.

Property Taxes and Real Estate Purchase

When you buy a house, property taxes can indeed change. The amount you pay in property taxes might increase or decrease based on several factors. After a house is sold, the local tax assessor often reassesses the home’s value. If the house is reassessed at a higher value than it was under the previous owners, the property taxes will increase.

Effect of Home Improvements on Property Taxes

Moreover, if you make significant improvements to the home – like adding an extension or completing major renovations – the value of the home may increase, which could also lead to an increase in property taxes. On the other hand, if the house’s value decreases for some reason (like changing market conditions or deterioration of property), the property taxes may decrease.

Closing Costs and Property Taxes

In the home-buying process, closing costs can also include property taxes. In most cases, you’ll need to pay a prorated portion of the property taxes for the year at closing. The amount of these taxes can therefore directly impact your closing costs.

Appraisals and Property Taxes

The appraised value of the property when you buy can also have an influence on your property taxes. If your home is appraised at a higher value than the selling price, your property taxes could be based on that higher amount.

Property Tax Exemptions

Some states and municipalities offer property tax exemptions, abatements, or credits to certain homeowners. For example, some places offer homestead exemptions that reduce property taxes for owner-occupied properties. If you qualify for one of these programs after buying a house, your property taxes could be lower than the previous owners’.

The Significance of Property Tax Knowledge

Becoming a homeowner often involves significant property tax commitments. Recognizing how these taxes can fluctuate after purchasing a house can significantly aid in budgeting and overall financial management. When procuring a home, acknowledging the possibility of escalating property taxes and planning accordingly is crucial. Gaining a complete understanding of your property tax obligations can help anticipate unexpected charges and ensure your new home remains budget-friendly over time.

Assessing Property Value

Insight into Property Value Assessment

The purchase price of your home may differ from the value that the local governing body assigns to it for taxation. Property taxes hinge mainly on the property’s assessed value, which could fluctuate from the market price. This assessed value is determined by the local assessor’s office. They take into account a variety of determinants, including the property’s size, location, construction quality, age, and any recent improvements or upgrades.

Bear in mind that properties undergo reassessment at regular intervals. Some regions reassess property values annually, while others may do it biennially or triennially. This implies that even if your home was recently purchased, its assessed value could change post-reassessment.

How Taxes Change When You Buy a House

When you buy a home, the property taxes you owe can change due to several factors. One common reason property taxes change is because the assessed value of the property has changed. If you’ve paid significantly more for your home than the assessed value, the local government may increase the assessed value to match your purchase price, thereby increasing your property taxes.

On the other hand, if you’ve managed to purchase a home for less than its assessed value, you can appeal to the local government to lower the assessed value and reduce your property taxes. Each local government has its own process and timeline for this, so it’s important to contact your local assessor’s office for information if you think your property is overvalued.

Factors Influencing Valuation

Other factors that can influence your home’s valuation and property taxes include improvements or renovations you make to the property. Improvements that significantly increase the home’s market value — such as an addition, significant kitchen or bathroom remodel, or adding a swimming pool, can also increase the assessed value and therefore increase property taxes.

The local government’s budget demands also can affect property taxes. If a local government needs to raise more revenue, it may increase the property tax rate or reassess properties at a higher value.

Understanding Potential Tax Deductions and Exemptions

If you’ve recently bought a house, you should know that apart from any fluctuations in your property’s value, you can have several deductions or exemptions that could help to lessen your tax obligations. Many states offer homestead exemptions specifically designed to decrease the taxable value of homes that are occupied by the person who owns them. Exemptions for certain demographics like seniors, veterans, or individuals with disabilities are also available.

However, it’s essential to keep in mind that any alterations to your tax responsibilities will generally not come into effect until the following billing cycle starts. So, it’s important for you to familiarize yourself with these potential changes before finalizing your house purchase to sidestep any unforeseen adjustments to your property taxes.

Tax Changes After Property Purchase

Demystifying Property Tax

Property tax is essentially a fee imposed by local or state authorities on the property owned by you. This tax is calculated based on the property’s assessed value, which factors in both the land and any structures present on it. When you take on the role of a homeowner, it’s key to understand that your property taxes are subject to changes beyond the point of your initial purchase.

Tax Changes after Property Purchase

The change in your property tax primarily occurs due to a reassessment of the property value after the ownership transfer. Depending on where you live, the local government could base their property tax on the purchase price of your new home at the time of sale. If the purchase price is higher than the previous assessed value, then your property tax could increase.

Reassessment of Property Value

Not all jurisdictions automatically reassess a home after it’s sold. In many cases, a reassessment occurs when property improvements have been made that could potentially increase the value of the home, such as additions or significant renovations. Additionally, local governments usually have a reassessment schedule to check the fairness and accuracy of the property value, which typically occurs every few years.

The “Step-Up” in Basis

The step-up in basis is a tax concept that applies to inherited property, and while it doesn’t directly impact property taxes, it can affect your overall tax liability if you sell the property in the future. The step-up in basis means the property’s base value, or cost basis, is adjusted to the fair market value at the time of inheritance, instead of the original purchase price. This could result in you paying significantly less in capital gains tax if you decide to sell the property.

Potential Increases or Decreases in Property Taxes

Several factors can influence increases or decreases in your property taxes. As mentioned, the sale of the house or significant improvements done to the property can lead to property tax increases. Changes in the local tax rate can also impact your tax bill. Conversely, the property tax may decrease if the assessed value of the property goes down due to reasons such as a downturn in the market, natural disasters, or depreciation.

Effect of Property Taxes on your Monthly Mortgage Payments

Paying your property taxes each month is typically wrapped up with your mortgage payment and dispatched to an escrow account. Your property taxes are subsequently paid by your lender from this account when due. Consequently, a considerable increase in property taxes will likely surge the amount you pay monthly in order to bridge the gap.

Dealing with Changed Property Tax

Comprehending Changes in Property Taxes

Owning a new house will likely to cause a shift in your property taxes. This is because the taxes calculated are dependent on the home’s assessed value, which is subject to change from one evaluation to the next. Local governments normally reassess these values habitually, usually annually.

Furthermore, in several regions, a major renovation or addition to a property, or even a change in ownership, is capable of instigating a supplementary assessment. This translates to the fact that if you’ve recently procured a house, there is potential for a hike in your property taxes due to the home being assessed at a higher value than it was under the previous owner.

Budgeting for Potential Increases

A hike in property taxes can put a strain on your household budget. When purchasing a home, it’s essential to take potential property tax increases into consideration. Shop around for homes in different areas with different tax rates, and be sure to factor in these costs when deciding on a home to purchase.

Challenging Unfair Valuations

If you believe your property’s assessed value is too high, you have the right to appeal the assessment. This process varies by locality, but it typically involves filing an appeal with your local tax assessor’s office. You’ll need to provide evidence supporting your claim that your property’s assessed value is too high, such as comparable sales in your area. Remember, it’s essential to follow your local tax assessor’s procedures to ensure a successful appeal.

Strategizing for Potential Tax Breaks

There may be property tax breaks you can avail when you buy a house. Some of these could include rebates or discounts for first-time homeowners, veterans, senior citizens, and persons with disabilities. Also, certain home improvements, like energy-efficient upgrades, can sometimes qualify you for tax breaks or credits. Furthermore, it is important to note that the interest on your mortgage is generally tax-deductible. The key is to research and take full advantage of any tax breaks available to you.

Setting Up an Escrow Account

An escrow account can be a helpful tool for homeowners looking to manage their property taxes. This is an account set up by your mortgage lender where a portion of your mortgage payment goes each month. These funds are then used to pay your property taxes and homeowner’s insurance when they come due. This can make budgeting simpler as these large expenses are spread out over the entire year.