Figuring Property Taxes for the High-End Real Estate

Did you know that many people pay far too much in real estate taxes every year, and few question the tax bill they receive?

It seems like a sad situation – at least when you pay taxes out of your paycheck, you can fill out a form at the end of the year and get any overpayment refunded to you. But it’s so much different when considering property taxes.

What are real estate taxes?

This seems like an elementary question, but it’s one worth examining a bit closer. These taxes include any land or real property, and the improvements of these. Typically, once a year a real estate assessor does just that – assesses the property for tax purposes.

This assessed value isn’t really the actual fair market value of the home; that would be an actual real estate appraisal, which is much more complicated and which involves an entire walk-through of the home and property to note every detail and amenity.

Because this assessed value isn’t the true market value of the home, many homeowners mistakenly believe that their homes are assessed at a simple, reduced rate. So, for example, if the market value of a home is $500,000, they believe it will be assessed for $300,000 for tax purposes.

However, what homeowners do not know is that property taxes are computed by multiplying the assessed real estate value by an equalization ratio, which is determined by each state and is applied countywide or throughout the state’s taxing districts.

The equalization ratio that is generally used by states is an average based on an equalization range – and here’s where it gets complicated for most homeowners who would rather not deal with the math. But really, it’s not that difficult.

As an example, if the low end of the equalization range is $1 (for homes valued at $50,000 or less) and the high end is $4 (for homes valued at $1 million or more), the average, or the equalization ratio, will be $2.50.

This means that the tax liabilities for all homes in the state assessed between $100,000 and $1 million will be determined with a $2.50 equalization ratio.

So, if a home has a market value is $200,000 but is assessed for $100,000, and the ratio is $2.50, the homeowner will be taxed on a house with a value of $250,000. These equalization ratios are increased periodically to keep pace with inflation and market transactions.

This is one reason that many homeowners pay too much in real estate. Chances are there are more who should be at the lower end of the equation than the government allows for.

Affecting the high-end properties.

When dealing with very expensive properties of a million dollars or more, this issue of over-taxation is one that a homeowner needs to give special attention. If someone with a $200,000 home is paying taxes on an assessed value of $250,000, how much in tax do you think someone with a $2 million dollar home will be paying? That additional $50,000 in assessed value is difficult for many families, but for the high-end homeowner, we’re talking assessed values that are over-inflated by half a million dollars – or more.

But what course of action can you take if you feel that your home is being overtaxed? Obviously if you have a lawyer on retainer you can simply ask him or her to address this issue, as may your CPA or financial advisor.

However, if you want to deal with this situation yourself, here are some options, according to Crown Financial:

Homeowners should analyze their current assessments and call the local tax assessment office and ask what equalization ratio was used in determining tax liability. If the tax bill shows an assessment of $100,000 but the ratio is $2, then the tax bill is determined on $200,000. If the amount on which the tax bill is determined is greater than the market value of the house, a challenge can be made.

To justify a claim that a tax assessment on their home is high compared to the market value of the home, homeowners can collect at the local deed recording office a copy of the records of the actual sales of similar homes in their area. These will collaborate the value of their home.

Research other assessments of similar homes in the area. This information can be obtained from the assessor's office. The assessments of all similar homes in an area should be comparable.

Compare any recent professional appraisals of the home with the assessor's appraisal or hire an outside appraiser to provide an independent appraisal.

Go to the assessment office and ask to see the assessor's worksheet. Homeowners have the right to see the assessor's worksheet that was used to determine tax liability. Check to see that there were no mistakes, that all property was described correctly, and that no personal property (personal property that is movable and not fixed) was included in the assessment.

Assessors are generally cooperative and willing to make adjustments if homeowners present convincing cases complete with written requests and copies of all substantiating documentation.

However, if the assessor does not agree to the reduction, homeowners have the right to ask for a hearing with the local board of review. These boards were formed to give impartial opinions in cases of tax discrepancies.

Consider taxes when making a purchase.

This over-assessment and overtax practice is one that any potential buyer needs to consider when deciding on a new home, but especially for those in the high-end range. While the initial purchase may be made with cash, this doesn’t mean that your home will then be forever free and clear. Property taxes will be assessed and paid for the life of the property, and you need to be fully prepared to meet this obligation every year.

And remember, it’s your right as a property owner and taxpayer to be sure that the amount you’re paying every year is fair and just. You not only have the right to challenge an assessor’s ruling, you may also have the responsibility, so as to bring to light any gross negligence on the part of their office.

Contents

• How Much Mortgage Can You Afford?
• Buying a Good Vacation Home
• Buying a Home for Resale Purposes
• Claremont is the Top Earner – and Most Expensive
• Commercial Real Estate Still a Safe Bet
• Determining Your Offer Price
• Empty Homes for Sale
• Exercise Caution When Flipping
• Expensive and Alternative Homes
• Figuring Property Taxes for the High-End Real Estate
• Florida’s High-End Real Estate Goes Limp
• Foreign Investors and the Hamptons
• German Investment in U.S. Real Estate Creates a Bidding War
• Getting Wealthy From Real Estate Investing
• Going Green
• High-End Goes High-Tech
• High-End Investors – Why Immune to the Real Estate Crunch?
• High-End Real Estate Feels the Crunch?

• High End Property Site Map