Property taxes: how to beat a rigged system
May 31st, 2021 by D.C. Poc
If there is one guaranteed, sure-fire way to keep the poor down, it’s property taxes. Just think, you spend 30 years working hard to pay off your home. You’ve finally made it. You have achieved the American dream - homeownership. But wait, you don’t “technically” own your home. It’s crazy, right? Well, not really. After all those years of making timely payments, the government still holds a controlling stake in your property, and honestly, they will forever. Keep reading as we talk about some ways to lessen the blow of these taxes.
What are property taxes
Property taxes are exactly what it sounds like: taxes which are levied by the government on your property, which includes all types of real estate (there are some other types of property taxes on things like boats, but we’ll discuss that later). These taxes are recurring, meaning they hit you in the wallet repeatedly each year. Unlike income taxes, there are very few ways to lower your property tax bill. If you don’t pay your property tax bill you will risk experiencing something called “tax foreclosure”, which is where the government auctions off your house on the courthouse steps. Essentially, the government is selling your debt. If you don’t pay this now delinquent tax bill, you risk losing your home for good.
How they are assessed
The government determines a fair market value for your home. This value is the basis they use to tax you. The tax rate is determined by the municipality's millage rate. A millage rate represents $1 per $1,000 of assessed value. So if your millage rate is 34.5, you’ll be assessed $34.50 on every $1,000 of assessed value ANNUALLY. Yes, this occurs each year… for your entire life… like, FOREVER. Crazy concept, I know.
This isn’t straightforward by any means. If you have a home with a value of $400k and a millage of 35, that doesn’t mean you’re going to pay $14,000. Instead, the municipality normally takes a percentage of the fair market value (FMV) and then applies the millage to that rate. For my county, we use 40% of FMV. So on a $400k home, you’re looking at an assessed value of $160,000 with a tax bill of $5,600. This $5,600 will normally be broken up between school, city, county, and state taxes. Additional taxes may be assessed, as some jurisdictions assess special rates for various things. Regardless, this is just a giant pile of excessive taxation.
Most states have various types of exemptions that give taxpayers a break. The most common is a “homestead exemption”, which allows you to apply for a small tax break on your primary home. In my state, this is $4,000 off of the 40% assessed value number we spoke about earlier. By homesteading in my state, you also lock your home value at the level of the 2nd year of taxes assessed. So if you bought your home in 2012 and immediately filed for homestead, you would maintain your 2013 home value into the future. This is a huge advantage for people who intend to live in one place for their entire life.
There are some other exemptions that are available, although they are more rare. These include exemptions for the elderly, disabled, and some veterans. These exemptions can range anywhere from thousands of dollars to complete tax forgiveness. But like I said, these are rare, so don’t bank on them.
How to lower your tax bill
In each state, there is a wonderful process known as property tax appeals. This process gives you various opportunities to challenge your tax bill, and hopefully, lower it.
The initial appeal is normally directly to the assessors office. This office was initially responsible for determining your value, and now that you are appealing, get the initial chance to adjust the value based on your request. They can either side with the homeowner, offer something in the middle, or reject the appeal altogether.
If the appeal is settled, the process ends. If denied, you can appeal to the board. In my state, this is known as the Board of Equalization. This board is tasked with ruling on property tax disputes in an unbiased manner. You have the opportunity to appear in front of the board and argue your case. The government also has the opportunity to argue their case. When it’s all said and done, the board either rules in the homeowners favor, offers something in the middle, or sides with the government.
If the matter is settled at the board, the process ends. If denied, you have the opportunity to go to Superior Court. At this point, you would have the opportunity to present your case in front of a judge. If you ever had a desire to be an attorney but feel that you missed the opportunity, this would be the chance to live your childhood dream! The judge can rule in virtually any way they want. If you lose here, your only option remaining would be to sue the government, which would probably cost more than your property tax bill in most cases. If you win, the process ends.
How to win big
So you’re probably ready to file your property tax appeal, right? Probably not. It’s not as simple as filling out a couple of forms and licking a stamp. There are some forms that require mailing, but you also need to find evidence that supports your case. You can argue your case on different merits, including value, uniformity, taxability, exemption denial, etc. I’m not going to get into all of these as again, they vary by state. I do want to talk about appealing on uniformity, which is the easiest way to win.
In order to win an appeal on uniformity, you need to make the argument that other comparable properties are assessed lower than yours, and as a result, your assessed value should be lowered commensurate with theirs. To make this argument you’ll need to research tax records and find a means for comparison of homes. Typically, the easiest way to do this is by comparing values in your own neighborhood. You can do this by converting each home value to a cost per square foot value, and then use this number to make apple to apple comparisons. This approach minimizes the government's ability to combat your claims, considering the houses are so close and are normally of similar construction, value, etc.
The government wants you to do nothing
The problem with property taxes: 98% (guesstimate) of people never take the time to review and, if necessary, appeal their property taxes. Instead, they just unwillingly pay each year since the property taxes are rolled into their mortgage via a process called “escrow”. The mere existence of escrow helps property taxes blend in. This significantly decreases the likelihood that a homeowner takes the necessary steps to lower the assessed value, and thus, their tax bill. Don’t let the government win because of your inaction. Pay attention and ensure you aren’t being overtaxed.
D.C. joined the Marine Corps right out of high school. When he left active duty, after 5 years of service, he quickly earned a bachelors degree and an MBA. He got his first private sector job at a modest salary and quickly worked his way up through promotions. Once he started making decent money ($38k at the time) he quickly realized he needed to learn how to save to secure his future. After nearly ten years of research, he wants to share his knowledge and financial best practices so more people can become Wealthy Idiots!