Let us face it, buying a home is expensive. Most people think your expenses end with the mortgage, but this is far from reality.
If you are not familiar with property taxes, you might be surprised by just how much they actually are. It is crucial that you know how to calculate your property tax before making a new home purchase.
This way, you will have an accurate estimate of what your monthly and annual home-related expenses will be.
Property taxes can change. Depending on the local real estate market, the assessed value of your home can go up or down.
This also holds true when you do home improvements, like remodeling or adding a new room.
Your local government laws may also change, causing a spike in your property taxes.
If you are a first-time homeowner, this can be confusing. Read on to have a clearer understanding of property tax and its effect on your home purchase:
What is a Property Tax?
Millions of homeowners pay property taxes every year. These are taxes levied by city or county governments on properties, mostly real estates.
Property taxes are calculated using the value of a property, including the land and buildings on it. The higher the value of your home is, the more you will have to pay.
Following the standards set by the taxing authority, assessors will value your property every one to five years and charge you with the appropriate rate.
You may be wondering if the current COVID-19 pandemic will affect property taxes. Experts agree that it will not, at least not in the immediate future.
Likewise, the current market fluctuations may not be as impactful as many think.
Even if property values decline now and in the next year, it will not matter much if you do not have plans to sell for ten years.
How to Calculate Your Property Tax
Property taxes may vary from city to city, county to county. Local taxing authorities set a rate, commonly referred to as a mill or millage rate, that each house will be taxed at.
This may change from year to year, depending on the needs of the government.
Calculations of a home’s assessed value may also differ. Some regions rule property tax is based on the sale price, while others depend on the market value.
This is very useful as the two tend to quickly diverge, especially if you’ve purchased a brand new home like one from Paradise Developments in Ajax, Ontario or another part of the Greater Toronto Area.
To help figure out how to calculate property tax on a house you plan to buy, check the most recently assessed property value in your location and look up the current property tax rate.
This is usually available on your county’s website or on the real estate listing for assessment and tax information.
Then, do the math – home’s assessed value x tax rate = property tax for my house. The amount is generally owed annually or semi-annually.
How to Determine Home Value for Property Taxes
To estimate property taxes on a new home, start with determining its value. You do not just look at the sale price of a house to know its home value.
There are other things to consider, including square footage, acreage, and home features. Construction materials and labor costs are also taken into account.
Tax assessors use several methods to determine a home’s value. These include income, sales evaluation, and cost methods.
The income method is based on how much income you could make from the property if it were rented. This includes maintenance and management costs.
With the sales evaluation method, the assessor values the property using comparable sales in the area, heavily prioritizing the local market trends and community features.
The cost method is used when the assessor determines property value based on how much it would cost to replace it.
Revising a Property’s Tax Assessment
Changes in homeownership may result in property tax changes.
Often, the first tax bill issued after a property transfer still reflects the previous owner’s assessed value, including exemptions and exclusions.
In the following months, an assessor may send a second property tax assessment, called a supplemental assessment, that shows the new owner’s revised tax data and charges, this time, reflecting the property’s most recent sale price.
Estimating Property Tax on a Home You are Buying
Understanding the calculations behind how property taxes are assessed will help you in several ways. If your tax assessor takes their time getting back to you with an accurate rate, your knowledge on how to calculate property tax on a house will come handy.
The same thing applies when you are bidding time for the supplemental assessment to arrive and just cannot wait to estimate property taxes on a new home.
One way of predicting the property tax for your house is to ask help from a realtor and mortgage professional, focusing the search on the areas where you are house hunting.
Once you know the tax rate, multiply it with your planned purchase price. This will be your approximate base property tax bill.
As previously mentioned, you may also find your area’s tax rate on your local government’s or tax assessor’s website. They are usually represented as a percentage.
You may also want to look if there are special assessments that apply. Adding them to the base property taxes will give you a more correct estimation of how much you are going to pay every year.
Of course, these numbers are just estimates and may not be accurate at all. Take this with a grain of salt.
Sudden changes in tax rates, laws, and area assessments may still impact your property’s home value, causing the rate to increase or decrease.
Knowing how much you will be paying for property taxes every year is just as important as knowing how much your monthly mortgage payments are going to be.
This is because determining the ancillary costs, from utility bills and taxes to maintenance costs and home repairs, is necessary for figuring out what you can actually afford.
With proper assessment, you can set the correct budget for your dream home and avoid setbacks later.