Whatever you think about property taxes, they are a fact of life. In Indiana if you own real estate you will be billed for property taxes twice a year in May and November. Property tax assessment and the methodology of payment often is a head scratcher for many people-particularly if the home owner is a first time home buyer or a home buyer from another state. Today I will try to provide some clarity to the issue so that homebuyers will have some idea of how the whole system works.
The process of evaluating a property's worth for taxation purposes is meant to employ a market based system so that the tax assessment is roughly what the property would be worth if it were for sale. Since every property is not sold on an annual basis there has to be some method of determining that value from year to year. The method that is used in Indiana is a method called Trending.
The state defines trending as: Process whereby property values are adjusted (the adjustment can be positive or negative) on an annual basis to bring them closer to market value-in-use. The assessing official uses sales of properties in a neighborhood, area, or class of property from the previous 14 months to determine the adjustment factor. In the past, the assessed values of real estate were adjusted only after a reassessment, which came as far apart as 10 years. Unlike reassessments, trending will occur every year.
Huh?
panopticdev.com
In other words, simply put, to clarify, I believe this means that computer modeling is done of geographic areas to get an idea of what is occurring with values within a particular neighborhood.
So if the characteristics of a neighborhood are all similar-homes built in a particular price range at about the same time, this snap shot of value may be in the ball park. Then again if you live in a neighborhood like mine with homes that range in age from five or ten years old to sixty years old - the values may be a tad off. (This is why I advise buyers that what the county records show as the value of a property for tax purposes may not be what the property is really worth, so basing an offer to purchase on what the county has as market value might not be a great idea - you might be way too low or way too high.)
From time to time I have called the county offices to ask for more of a clarification of how assessments are determined but thus far haven't received succinct enough answer to pass along as fact to anyone yet. For that I apologize. I think everyone is confused - just sayin'.
The good news is that I am a bit more well versed on how taxes are actually paid. This too is confusing, but understandable once you wrap your head around it.
So here we go. In Indiana taxes are paid a year in arrears-meaning that in 2014 it is the 2013 taxes that are due. So if you purchase a home in 2014 the seller will owe you the unpaid taxes for the portion of 2013 that hasn't yet been collected (right now the second half of 2013, due this upcoming November) and the portion of 2014 that the seller has owned the home. The way this money is handled is it is given as a credit to the buyer on the settlement statement at closing. In other words, it is subtracted off the amount of money you would bring to the closing table. For example- if you were supposed to bring $8000 as your remaining down payment and closing costs and the taxes that seller owes were $800, the $800 would be subtracted from the $8000. Then, this upcoming November you as the new owner of the home would make the tax payment. Most mortgage loans collect the taxes upfront in the monthly payment and deposit it in the escrow account for your mortgage loan so the lender will make the payment on your behalf. Most lenders will not allow the buyer to pay their own taxes unless they put 20% down, though we do work with a couple that will allow the escrow accounts to be waived if 10% is put down. If you don't have an escrow account then you will have to write a check to the county treasurer twice a year.
Where this system gets a bit more murkey is when the house being purchase is a brand new home or a home that has been unoccupied or occupied by a tenant rather than an owner occupant.
Let's tackle brand new homes first. Since taxes are paid a year in arrears, the value of a new home is a year behind in assessment. The taxes on a brand new home are based on what was on the land the previous year. Which was nothing. So if you are buying a new home in 2014, last year all that was on your building site was dirt-and dirt isn't worth as much as an improved building site with the house sitting there all nice and ready to move into. So-the first year you own the home all you owe is something crazy like $26 bucks a year. However, when the lender determines the escrow account , the lender doesn't want the borrower to have the payment shock that will come when the house is fully assessed and the owner has to pay the full load of taxes. So to remedy that situation the lender is going to use 1% of the value of the home to determine what will be taken into the escrow account for taxes. (1% because that is the maximum the state allows for property taxes.) But here's the thing...the Federal Government has rules about how much of a borrower's money a lender can keep in the escrow account and it won't be too long before there is too much in the account because the only taxes of record are the low taxes on the dirt. What happens then is that the home owner will receive a check from the lender for the overage. But here's a word of caution - don't go out and spend that check on wine and dancing girls...
Because if you do, you won't have the money to give back when the actual assessments catch up to the escrow account and there is a shortfall and the lender wants you to make up the difference which you wouldn't have to do if they hadn't sent all the money back.
Now let's tackle the topic of exemptions. What? Sorry, I am really not trying to blow your brain out here.
Exemptions are discounts that you receive for living in and having a mortgage on the home. The state allows you to reduce the taxable value of your home if you live there and have a mortgage to the tune of $48,000. So if your home is worth $100,000 (due to the precise process of trending) you are allowed a $48,000 discount on that assessed valuation so you would be taxed on a value of $52,000 not $100,000. So that's cool. There are other exemptions that you might qualify for-the blind World War one veteran exemption for example, but the main two are what is known as the homestead exemption and the mortgage exemption.
If you purchase an unoccupied property or a property that was a rental property you do not get the benefit of the homestead exemption the first year you own the house-so your taxes will be quite a bit higher-maybe triple what they would be with the homestead exemption in place. This is a fact that you must keep in mind when selecting the home you wish to buy. If your debt to income ratio is high, the property taxes of a home without the homestead exemption could make you ineligible for your loan. Or if you weren't aware of this fact, you might have a surprise when you see your total payment. But, keep in mind, this is just for the first year-after your exemptions are in place for a year the payment will come down.
I hope that clears it all up for you.
No comments:
Post a Comment