Property Taxes: What You Need to Know

Buying a house used to be simple. Most realtors told you it's all about location, location, location and for many years this was true. That's because “… You can buy the right home in the wrong location. You can change the structure, remodel it or alter the home's layout but, ordinarily, you cannot move it. It's attached to the land,” according to TheBalance.com … But things change, and how you calculate the cost of home ownership is changing. Things like property taxes that used to be deductible on your federal tax return aren't a sure bet any longer.

Property Taxes Before & After the 2017 Tax Cuts

In many parts of the US, property taxes are relatively low … with some annual property taxes below $250, primarily in the south. Other counties have average (all houses in the county) property taxes that approach $10,000 per year. In fact the property taxes for my old house in Portsmouth, NH are more than $14,000 compared to $3,500 when we moved there in 1999.

New Hampshire (and Texas) property taxes are fairly high because there is no state income tax. But other states with high property taxes including New York, New Jersey, Pennsylvania and California also have high state income taxes. This represents a big financial hit to homeowners in these states beginning with their 2018 federal income tax returns. To summarize the impact of the 2017 Tax Cuts and Jobs Act on home ownership:

**There is a lot of confusion about deducting interest on second homes and home equity loans. A bit more research uncovered what hopefully are the correct guidelines from the IRS. “… interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.”

Will Property Taxes Influence Your Next Home Purchase?

When you buy a house, you focus on meeting the qualifications set by your lender. Their focus is on the amount of the loan compared to your debt ratios. These ratios are a good indicator of your ability to make debt payments month after month.

Lenders expect your mortgage (principal and interest) payments, property taxes and homeowner insurance, to be equal to or less than 28 percent of your gross income. There's a second “back-end” ratio that looks at your total debt picture. It includes things like college loans, car and credit card payments. These ratios are calculated without any consideration given to how your mortgage interest and property taxes might lower your income taxes.

You might not like having to pay more taxes thanks to the Tax Cuts and Jobs Act, but now you know more about the affect property taxes will have on your monthly cash flow. Looking at the big picture, you might even decide to buy a house one town over from your ideal location.

Here's a real example of when I had to make this decision many years ago. We found a house we liked in San Jose, California but our son could not go to the school across the street because of court ordered busing. So we looked for comparable houses in Los Gatos, a neighboring town to the west of San Jose. The differences were significant. The house price was 30% higher and so were the property taxes. We liked the San Jose house better with it's neighborhood pool, swim team and wonderful parks just a few blocks away. We ended up paying for Ryan to go to a private school nearby (he could ride his bicycle there).

Want to compare average property taxes in different counties. Visit CNN's interactive version of map shown above …

How Property Taxes are Established

It's challenging to understand property taxes because there isn't a standard formula that all counties and states use. Looking at the map above, you can see the states that pay a higher percentage of a home's value for property taxes. Rates vary across the US, from less than 1% to more than 2% (check your counties tax rate here, CNN's interactive version of map shown above. Here are the steps that go into calculating the taxes you'll owe on your house.

1. A property assessment is determined by your local tax assessor every year, or even once every five years depending on state/local laws. The estimate of your home's market value is done in one of three ways:
   • Sales comparison – will compare your home to similar properties that have sold recently, in the neighborhood. Like appraisals you get when buying/selling a house, adjustments are made for home features that differ from the comps.
   • Cost method – calculates how much it would cost to rebuild your home from the ground up, including building materials and labor. Adjustments are made for depreciation with older properties and the value of the land is added to the value of the house.
   • Income method – is used predominantly for commercial properties, estimating the rental income you can expect if the property was rented based on the cost of maintenance, insurance, utilities, etc.
2. The local tax rate (also called the mill rate/levy) adds together the tax levies for all tax jurisdictions in your area. The jurisdictions are ones that provide services like your schools, fire departments, libraries, local town/county government, etc. The tax levies represent the projected budget for each of these community services divided so the cost is fairly distributed across home and business owners owning property in a given town.
3. Property taxes are calculated by multiplying your property's assessment by the local tax rate.

Here's an short video that does a very nice job explaining how property taxes are calculated …

Want to learn more about the total cost of home ownership? Here are some of our more popular articles:

• True Cost of Home Ownership
• Preparing Your Homeowner Budget
• How Remodeling Affects Property Taxes
• Proposed Tax Changes & Home Ownership
• Finances & Making Sure You're Ready to Buy a House

PS Here's the best summary on the tax law changes found when doing research for this article, A Guide to the 2017 Tax Changes.