Friday, October 31, 2014

Homestead Exemption

Property taxes, once considered insignificant, are now enough to price you out of a home!

I recently received an e-mail from our former County appraiser.   He claims that an awful lot of people were overcharged for their property taxes, over the last few years, as their assessments viz-a-viz the homestead exemption, were incorrectly calculated.

This got me to investigating the issue and I found out some interesting things -  including a few that will save me money down the road, on my property taxes.

Homestead exemptions differ from State to State.  Here in Georgia, we call this the Scarlett-Williams Homestead exemption act.   Under this act, if you claim your property as your primary residence ("homestead") your assessed value is capped at the value for the first year you occupied the property.

The controversy (if there is one) is that the County claims this means the first full year you occupy the property, from January 1st.  The former County appraiser claims it is the year you bought, even if it was December 31st.

Needless to say, this has caused quite a shitstorm with the County - which may or may not have been his intent.  He is, after all, the former appraiser for the County.   The County, of course is denying any over-assessment took place.  And if they say "no", well then you have to file suit in Superior Court, and not surprisingly, many homeowners don't think it is worthwhile to go to that effort, particularly if the amount in question is only a few hundred dollars.

We bought in May of 2006, and claimed the Homestead Exemption.   Our assessed value was $131,000 that year.   The next year, the assessed value shot up to $162,000.   The county used that value to determine our taxes.  The former Assessor claims they County should have used the 2006 number and locked us in at the lower assessed rate.

The tax amount is determined by the millage rate (tax rate) for the County, City, School Tax, and the like, multiplied by the assessed value.   Our Homestead law only caps the assessed value, not  the millage rate.  So it is possible our taxes could go up in the future, and indeed, the millage rate has risen over the last nine years.

Of course, since 2006, the assessed value of the home has gone down to the point where it is now assessed at $134,000, or about $3000 more than the value in 2006.   So, other than 2007, our home was not taxed at the higher $162,000 Homestead Exemption assessment, but rather at a lesser value, which has declined until this year.

And yes, it is possible to now "lock in" this lower assessed rate by signing a new homestead exemption form.   However, as you might imagine, the County authorities don't advertise this a lot, as they would prefer you be locked in to the higher amount.  I went to the County office today and signed the papers to lock-in at the lower rate.

I will study the legal arguments made by the former County appraiser and decide whether to file suit.  I have until November 15th to file my claim with the County.   I suspect the appraiser may be misreading the law.   But I appreciate him giving me a "heads up" on this issue, as going forward, my tax bills will be lower.

Why are property taxes important?   Well, in the olden days, they really weren't.   They were an incidental part of your mortgage payment, on a par with your homeowner's insurance.  Since most folks pay these as part of their mortgage escrow, they don't even notice the overall tax bill.   You do notice it when you pay off your mortgage and the bill comes directly to your home, and you have to pay it in one lump sum, though!

And over the years, property taxes have skyrocketed, particularly in the Northeast, in places like New York and New Jersey.   This is why I no longer live in New York, by the way.   Even the South, they can be steep.   The Homestead exemption act there has backfired, allowing a few people (who have lived there a long time) to have very, very low tax bills, while the newcomers and out-of-State residents are socked with the balance.

We recently inherited a house in Florida, and it is on the market.   Under the homestead act, the taxes were a paltry $2500.   If we assumed ownership of the house, the taxes would jump to $10,000 or more.  It simply isn't affordable, even though it was an inheritance!

Why are tax bills so high?   Well, as previously noted, Florida is a special example, as its homestead law makes taxes for some folks low and for others high.   But like in the Northeast, many local municipalities have gone on a spending spree, which makes up the other half.   In New York, the big ticket items were public assistance and teacher's salaries.    The Federal Government forces the States to have welfare programs.  The States in turn, pass this off to the Counties.   The Counties in turn send the bills to the homeowners.   If you are unfortunate enough to live in a County with a large welfare population (for example, one that includes a large, depressed city with a lot of unemployed folks) then your taxes will be sky-high.

And in New York, a teacher can make a six-figure salary with huge benefits and a very comfortable retirement plan.  The unions have pushed this "underpaid teacher" nonsense for years, and have stacked local school boards and Country commissioners offices (by funding election campaigns).  Firemen and Police have done likewise (particularly in California).   And of course, even the most impoverished County needs a new school building with a planetarium (I am not kidding here, the Town of Ledyard, a small "cow town" that doesn't even have enough students to fill one school, has two new schools, one with a planetarium!).  So there are bonds to pay off for the construction of these white elephant monsters.

Hey, every high school needs a swimming pool, right?   Well, not exactly.  We didn't have one in my high school and we did pretty well (although our swim team never made the State finals).

So, suddenly, property taxes shoot up - particularly over the last two decades.   And in a way, it isn't fair.   You may own your home free-and-clear, but that doesn't mean you are "rich" or have a high income.  The tax bill is predicated that if you have a nice house, you must make a lot of money - which isn't always the case.  The bill comes, and you can't pay it.

So, many States have some sort of relief in place.  Homestead exemptions, for example, may exempt part of the home from taxation, and lock in an assessed rate.   Others cap increases in the overall tax bill by a certain percentage per year.  Still others offer relief, but only for those with low incomes, or Seniors, or both.

If you buy a home, be sure to look into this, and sign up as soon as possible.   If your assessed rate goes down (not likely to happen in the near future, I think) be sure to find out if you can lock in at the lower rate.

A friend of mine recently bought a home in Florida, and I asked him if he signed the Homestead exemption papers.  "Gee, I'll have to look into that," he said.   But a year has gone by and no doubt the assessed value of the home has shot up.   He can no longer lock-in at the lower rate.   This is not something to be blase about.

At my age (55) property tax rates matter.  As I lurch toward retirement (ding dong!  Already there!) and my income declines, it is very important to keep an eye on expenses.   And recurring expenses are the worst kind, particularly if they creep up over time.   Lowering property taxes and keeping them low is essential in retirement (as least for middle-class schmucks) as it can be all-too-easy to be priced out of your home, if property taxes start to skyrocket.

As I noted in another post, it costs me about $725 a month to live in this house, without a mortgage.   Between property taxes ($2700) and insurance ($2200), the fire fee ($650), the lot lease ($400), electric ($160 a month), water, sewer and garbage fees ($150 per quarter), car toll decals ($90 a year).  This is enough to pay the rent on an apartment, or indeed, a duplex here on the island.   Property taxes are the single biggest expense in owning the home.  Note that I have not counted routine maintenance in the mix.

When I was a kid, I had no clue about property taxes, and we lived in a house on a lake in a fairly affluent town in Central New York.   One day, the County tax appraiser came to the door and asked if my parents were home.   I told him, "No" and he stared asking me how many bedrooms our house had (six) and how many bathrooms (five).   When my Dad came home, I told him this strange man came by and asked how many bedrooms and baths we had.  And when my Dad found out I told him the truth, he went ballistic.   The County had us down as a three-bedroom, two-bath house, and it was taxed at that level.   Needless to say, the assessment went up that year.

20 years later, my parents sold that house, in part because they could cash out on the equity and in part because it was an expensive house to own, with a high property tax bill.  Waterfront property is usually socked pretty heavily, it seems.   Out-of-town owners are nailed as well.

It is possible to challenge your assessment, of course.   You can go online and look up the assessed value of your home and compare it to your neighbor's homes of similar size and location.   If your house is in line with other homes in your area, chances are, a challenge to the assessment won't go very far.  But some have tried this, with mixed success.   Usually the Tax Commissioner will throw some sort of bone to the homeowner.   But dramatic decreases in assessments usually don't occur (unless someone has seriously overvalued your home!) for the simple reason that if you get a huge reduction in your assessment, then all of your neighbors will want one as well.

Back when property taxes were low, this was not a big issue.  Today, with five-figure tax bills becoming the norm in many States, many folks are even hiring lawyers to challenge their assessments!

Of course, this tax bill issue highlights once again why it makes no sense to buy more house than you need.   You may think the mini-mansion with the granite countertops is within your reach.  But the tax bill will skyrocket the second year you live there, when the property is reassessed based on the resale price.

And indeed, in places like Florida, this was a real issue in the Real Estate meltdown of 2008.  People bought these homes and thought, "Gee, the taxes are pretty low!" because they were based on the value of the house when the previous owner had it.  And the previous owner had a homestead exemption granted in 1973.   The developer bought it from their estate and gutted and remodeled the place and sold it to you.   After the purchase, the house is re-appraised, in part based on the new purchase price (far higher than what the developer paid for the place) and suddenly your budget is whacked by an additional $8000 a year.   It was the straw the broke the camel's back, for many of these "mortgage-stressed" homeowners in the 2000's.

Property taxes matter.  And it is these taxes that the "tea party" people are most mad about.  Federal and State taxes really haven't changed much in the last decade.   Property taxes, on the other hand, have priced the middle-class out of their homes, in some instances.

UPDATE:  I was at the County assessors office getting plates for my car (auto registrations are handled by the County tax office, driver's licenses by the State Police, in Georgia).   I commiserated with her regarding the tax situation and she looked up my property.  Due to the recession, our property was assessed for less that the original purchase price and had been going down for years.  We signed a new Homestead Exemption form, which locked us into this lower rate.  So.... problem solved.