In a 1789 letter to Jean-Baptiste Le Roy that referenced the establishment of the U.S. Constitution, Benjamin Franklin stated that "in this world nothing can be said to be certain, except death and taxes." The quotation can be attributed to other sources, but there isn't much escaping the fact that it's true.
Among the many taxes we pay are sales tax, income tax, estate tax and the capital gains tax. And, of course, there is property tax.
In owning real estate, there are associated taxes, which vary depending on the location, how you use the property, its condition, size and more. How a locality determines property value differs by state, city and township, but real estate taxes are a very real part of property ownership. And who doesn't want to lower their taxes?
The federal tax reform finalized in 2017 limited state and local property tax deductions to $10,000, when it used to be unlimited. As a result, much of our tax deductibility has been drastically changed, and some people are debating whether they would benefit from a move to reduce their property tax bill.
Before you move to lower your property tax bill, Jodi Carter, a certified public accountant in New York City, recommends looking at the bigger picture.
"This change in the law sent people scrambling for solutions before they understood the implications. For example, if you can no longer deduct real estate taxes of $10,000, your overall homeownership costs may have increased by $2,000 to $3,000 per year," Carter says. "Moving is a pretty extreme solution if that is the problem. It makes sense to consider a move if you are committed to lowering your overall costs, but to do so just to manage income taxes is not going to be an appropriate choice for most people. Focusing on the cost of the home, maintenance and, yes, property taxes, can have a significant impact on your financial life."
If you are looking to lower your homeownership costs by moving, here are a few things to consider regarding how real estate taxes might factor in.
Carefully Establish Criteria That Are Important to You
One surprise that some people find in certain metropolitan areas is that the real estate tax rates are often much higher in the suburbs. Many people have come to accept the longer commute and the responsibilities that come with owning a single-family home in exchange for the benefits of a larger home with more square footage, fresher air, more green space and in some cases more affordable public schools.
Indeed, the higher property tax can be offset by the savings that many parents find when they no longer have to shell out the dough for often jaw-dropping private school tuitions -- as high as $40,000 in some cases.
Certain counties or neighborhoods have higher real estate taxes than others, maybe just a mile away, because of the funds allocated to the local public schools. For many suburbs, like in New York's Westchester County, property taxes are the main source of public funding.
For example, one couple who lived in the suburbs of New York City moved immediately after their youngest kid went off to college. They'd been paying high real estate taxes because the local public school was one of the best in the country. Once their kids were no longer using the public school, they felt that it would be economically wise to move to another town. They moved to a larger house, but in so doing, paid lower real estate taxes because they no longer needed the school system. Years later, they moved to a different part of the state where the town does not have a local public school, and thus lowered their real estate taxes even more.
Move to a Town That Has a Lot of Local Business
There is something undeniably charming about living in a sleepy village where the most action is at the intersection of State and Main, with a handful of restaurants, an ice-cream parlor, a farmers' market and an art gallery or two. But this means there may not be any large businesses helping to cover the real estate taxes. Especially when a suburban town is made up of primarily residential neighborhoods, there aren't many businesses to pay commercial property taxes.
Towns with larger employers not only have the business to help support the tax base, but also the added employment opportunities for the local population, which in turn attracts more residents and can spread out property tax needs among more people.
"If you choose a town that has a big tax base, this helps to keep the taxes lower," says Michael F. Levy, the principal broker of Grand Lux Realty, a real estate brokerage in Westchester County. "This is why a house in Armonk might have half the taxes of a house in Scarsdale or Larchmont (just a few miles away)."
Buy an Older House and Renovate Instead of Buying New
When moving, you should weigh the pros and cons of buying something brand-new versus taking on a project and updating an older property. Aside from determining whether you have the bandwidth to undertake a renovation, the real estate taxes may play a bigger role than you thought in gauging that decision.
"Another thing that helps to keep taxes lower is increased development," Levy says. In terms of real estate taxes, he says, "An old house might cost a third of a new house. This helps keep taxes down for everyone."
If you have the bandwidth to renovate, buying an old house with low real estate taxes and renovating it could be more cost-effective in the long run than buying a brand-new home on a comparable plot of land, since new construction is assessed at a higher tax rate. If you stick to the basic layout of the old house and don't move walls or add to the footprint, the permitted work likely won't require a new tax assessment by the county or city.
Since new development can add a lot to the tax base, Levy adds, "if a moratorium is placed on new development in a small town, then the taxes may significantly increase over the next year or so."
To encourage new construction, a city may allow for a tax abatement for newly built properties. The abatements for ground-up development can be passed along to the new buyers with the understanding that real estate taxes would be increased on a predetermined schedule over a 10- to 25-year period. If you can take advantage of tax abatement on new development, that can be a great way to lower your real estate tax bill in the short term, but with the understanding of how and when that abatement will end.
Beware, though: For conversions, where an older structure is renovated and marketed as new, the property is often sold based on the real estate taxes of the previous structure, which was likely not the level of luxury it is now. The new owner can be assured of paying higher taxes as soon as the property is reassessed.
For example: One building that had consisted of small, unrenovated rental apartments might not have carried terribly high property taxes. Once the building was gutted and turned into sprawling condominium homes with high-end finishes, the certificate of occupancy prompted a tax reassessment, not dissimilar to the example of overhauling an older suburban house.
In general, real estate taxes can get complicated the deeper you delve. A local real estate agent or financial adviser can help you navigate how taxes might differ from town to town, or even neighborhood to neighborhood.
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