In honor of everyone’s favorite time of year, tax season, we wanted to highlight a particularly interesting piece of the current tax code structure: property taxes. These taxes are unlike most that we pay day-to-day. Rather than being attached to your social security number (employment) or an individual item that you walk out of the store with (sales)—property taxes, as the name suggests, are attached to the property. This creates a unique issue when you buy a home—if the previous owner has unpaid property taxes, those costs could be passed on to you.
What Property Taxes Do and Who Regulates Them
Property taxes are assessed and levied at the individual county and/or city level. These fees generally go to pay for public schools, utilities, and other local miscellaneous costs. Tax rates vary widely and are annually calculated as a percentage of your home’s assessed value.
For example, a house assessed at $350,000 in Chicago would have an effective tax rate around 2.009% or $7,032. However, if you owned a home assessed at $700,000 in Los Angeles, the rate would actually be less at .793% or $5,948 per year.
Someone Can Buy Your Road and More
Since property taxes are often wrapped into your mortgage payment, it’s easy to put them out of your mind. However, not paying attention to your property tax payments can have dire, real world consequences. As mentioned above, you can be held liable for unpaid taxes from a previous owner. Furthermore, if left unchecked and unpaid, all or a piece of your property can be sold by the government at auction, leaving your investment open to the highest bidder.
Recently in an upscale neighborhood in San Francisco, two investors literally bought the street and sidewalks out from under the residents. The private road was put up for auction due to a “$14-a-year property tax bill that the homeowners association failed to pay for three decades.”
The street, which is lined with “35 megamillion-dollar mansions”, was sold for $90,100 to two South Bay investors, due to a $994 in back taxes and penalties. The new owners had several ideas for how to capitalize on their investment, including charging longtime residents to simply park outside their door.
The locals cried foul—alleging the city/county sent the bills to the wrong office location for years, among other things—and eventually won the private road back. However, the whole process took over two years to resolve and was fairly controversial.
Protecting Your Investment
In the vast majority of real estate transactions, a new buyer will need to apply for a mortgage. In this instance, the bank or lender will require that the borrower buy title insurance. Title insurance protects the buyer and lender against unforeseen claims or “clouds” on the title, such as unpaid property taxes.
Even if you do purchase title insurance, it’s still important (as illustrated above) to keep up to date on your property taxes. If you find an unforeseen bill, file a claim with your title company and clear up the charges before it’s too late. Find your local property tax authority here.
Buying a home will most likely be the single largest purchase that you make, and getting slapped with an unexpected tax bill or having part of your property auctioned can cause unwanted financial whiplash. Understanding the way property is transferred, taxed, and regulated is a crucial component to making a sound, savvy, and lasting real estate investment.