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September 23, 2010

A property-tax reminder for new buyers

A colleague of mine had an unfortunate new-homeowner surprise this summer: She got her first full fiscal year property-tax bill, and the monthly cost is a lot higher than she expected based on the taxes she paid for part of the last fiscal year.

She's hardly the first to be caught off guard, thanks to the state's complex Homestead tax credit.

I did a post recently that explains how you can calculate your property-tax bill in advance to avoid a shock come July 1. But here are more details on how the Homestead credit works, since it seems to be a frequent point of confusion.

The Homestead credit is really a cap: It limits the annual increase in owner-occupants' taxable assessments, thus limiting the increase in your property-tax bill as long as rates don't change. The Homestead ceiling ranges across the state. It's 4 percent in Baltimore and Baltimore County, for instance, which means you can't see more than a 4 percent increase in the portion of your assessment you're taxed on in any one year.

There are four exceptions to the rule, the state assessors say. The cap lifts for a year if the previous assessment was "clearly erroneous," if you successfully request a zoning change that increases the property value, if you make a substantial change to the property (rehab it, for instance) or -- and this is the one that comes into play for new buyers -- if the property transfers to new ownership.

If you buy a home in, say, November, the property taxes you pay for the remainder of that fiscal year are based on the previous owner's liability. That means you "inherit" their Homestead credit temporarily. Then the next fiscal year rolls around July 1, the Homestead cap comes off and your bill is calculated off the total assessed value figure for that year.

Which could mean a much higher bill than the previous guy paid. It all depends on how long he or she owned the place and how much values changed during that time. (Even with falling prices, there are plenty of homeowners paying on less than their property's current assessed value.) For one Wonk reader, the increase was 74 percent.

When will your Homestead credit kick in? The second July 1 you're in the property.

I hope everyone who comes into contact with soon-to-be buyers makes sure they understand how this works. For some folks, a couple hundred dollars extra a month in unexpected property taxes can make the difference between a comfortable budget and a tight one.

UPDATE -- a few more reminders:

1. Don't forget to apply for the Homestead tax credit. You used to get it automatically, but now the state wants to make sure you're not collecting it on more than one property.

2. If you're buying a newly constructed home or a rehab that had been vacant in the city, don't forget to apply for the new-construction tax credit. It cuts your property-tax bill in half the first year.

3. Remember that you can appeal your property-tax assessment after you buy -- and any year, in fact -- if you think it doesn't reflect market value.

Comments

Great post Jamie. I think that lenders and realtors are doing an extreme disservice to their clients if they fail to inform them of this issue. From my experience, failing to disclose happens more often than not.

If I buy a home for $400,000, but the tax assessment says its value is $510,000, will I be taxed on the amount I paid or what the State says it thinks it is worth?

I'm closing on a new construction house in Canton in October. Do I have to apply for the Homestead Tax Credit?

Yes, Lawrence, you need to apply for the credit. You can download the form here.

don't forget to mention that baltimore city has way way waaaay higher taxes than most people may realize. If you are moving into the city from within the state or from out of state, realize your're paying an extreamly high tax rate for a city with huge issues. extreamly high crime rate, murder rate, fine rates, property taxes, income taxes, grime, pollution, poverty, poor schools, inferstructure. The list may supprise an new comer paying their new taxes.....welcome to Baltimore if you are ok with all of it

The real crime here is that the politicians and their union friends have been bilking the public for decades with inflated prices and over blown property taxes. Somehow I think the current recession might just pull the curtain away and show the public the full extent of this scam.

Andrew, you'll pay taxes based on the assessed value. However, you can appeal right after you buy, which is a good idea if you're sure the actual market value is lower than the assessment. (The state reassesses each property once every three years, but you don't have to wait for that reassessment to appeal.) More here: http://weblogs.baltimoresun.com/business/realestate/blog/2010/03/no_need_for_buyers_to_wait_to_appeal_tax_assessment.html

Lawrence, you'll want to apply for the Homestead tax credit AND the city's new-construction tax credit. (Thanks, MCG, for giving the link to the latter.) The state requires everyone to apply for the Homestead tax credit now. Details: http://www.dat.state.md.us/sdatweb/Homestead_app.htm

allen, if you look at the link about calculating your property taxes, you'll see I included every jurisdiction's rate and an example of how much you'd pay with a typical assessed value.

This happens a lot because realtors and title companies and lenders do not tell new owners the true tax. But new homeowners should also do their own research. Call the tax office or look it up online and see what the taxes would be without the credit. I find that new homeowners do not research enough or learn enough about homeownership before they buy.

Lawrence, we are in the same boat (just purchased new construction). Note that you can pay this year's taxes in full and elect to start the credit beginning next July 1 if you want to get the credit for the entire year (credit is applied from the date of closing, so in our case we've already lost the credit for almost 1/4 of the year if we elect to use it for this tax year).

Has anyone here ever run the thought experiment of property taxes as a percentage of income? Given that the current median income to median purchase price ratio is currently 3.5, Baltimore City's property tax rate of 2.1% is closer to 7.3% as a percentage of annual household income.

Josh- interesting post. I really don’t think b-more is a sustainable model. You have a host of unionized gov't employees that have negotiated sweet-heart retirement/benefit packages and a population that is largely non-tax producing, living on off of the gov't themselves. This is not unlike some condo buildings in South Florida. If you have a condo tower that is 20% occupied, then that is a handful of people that have to share all the condo fees that should normally be shared among a fully occupied building. You could give me the half million dollar condo for free and i still couldn’t afford the condo fees/taxes/insurance for a hurricane state. Look at another article in the sun today that describes an inner city murder and shows a picture of the block of boarded up homes. Why anyone would want to pay a *premium* in taxes to live there is beyond me.
Worse yet- our govt has chosen to export their trash from the city to the county in the form of section 8. These people don’t assimilate into the community. They rub your nose in it as if to say, "yeah m-fer, I am here to trash your sh&t and you're paying me to do it". While I am on point- Jaime, why not explore the topic of section 8 and its impact on neighborhoods? Or, would the Sun consider that to be politically tabu?

elweedz, I recall Gady Epstein touching on Section 8 in his series several years ago about Columbia. Here's Part I: http://www.baltimoresun.com/news/maryland/howard/bal-columbia-part1,0,3456578.story?page=1

Jamie-

Thanks for the link, all 7 pages of it! I found it a very interesting read. While I don’t want to hijack your blog into a debate on the races, I would like to comment on the amount of effort that goes into pretending that the elephant in the room doesn’t exist.

Whites ( and I use this term to include most racial entities- Italians, Asians, middle eastern and even people of dark color like the Caribbean etc) generally don’t want to be bothered with understanding the "culture" that comes with blacks (Americanized). It’s easier (safer) to simply outspend your way away from areas with higher concentrations in the form of urban flight. Like it or not, it is the truth we all know exists.
No one needs or cherishes the diversity that the politically correct say enriches our lives. Our world would be fine if we were all one color or all different colors. No one needs the diversity of ghetto/gang/Ebonics/fatherless children/illegal guns/rims that cost more than the car- to enrich our lives.

Given the choice, even the most sensitive of us to racial cultures will always speak with their dollars and move to areas that are less populated by the American black. We will do this under the guise of wanting better schools with less crime. A convenient euphemism for saying, "best I can afford with the least amt of diversity."

The Atlantic Monthly published an interesting article on some of the problems associated with Section 8 program in conjunction with tearing down public housing projects in Memphis, Tennessee. http://www.theatlantic.com/magazine/archive/2008/07/american-murder-mystery/6872/ I think the Sun also published some articles on this, and how it contributed to the property flipping epidemic in the late 1990s. Most of the participants in the Section 8 program are decent people (not "trash" as bigots like elweedz calls them) but the program also has it's fair share of problems that need to be addressed.

Went to bed early last night, so I'm just catching up with comments now, and I'm uncomfortable with where this conversation is heading, guys.

Please, let's not go the "all [fill-in-the-blank] are [whatever]" route -- speaking as someone who comes into contact with a lot of different people every day, I've found that most defy easy categorization. (Most social problems defy easy fixes, too, or they'd probably be fixed already.)

And remember, too, that this blog has a "no name calling" rule. That keeps the conversations collegial, which is really important to me. Too much of the Internet is ugly these days, don't you think?

I don't like deleting comments. I'd rather err on the side of posting. So the trick here is to think before writing.

Thanks, all.

Section 8 serves as a real boon for slumlords (gotta hear MCG's thoughts on this) and a real boondoggle for everyone else, including and especially low income people who it is aimed at helping.

Ultimately it drives up both the rental price and the sales price of housing above sustainable levels based on incomes, and creates a cycle of its own self reinforcing need, especially when used widely enough to be a true market maker in places like Baltimore. Just look at all the neighborhoods in Baltimore that are dominated with Section 8 rents of $1000/mo or more and ask yourself what these properties would likely be renting for in the absence of the program. The problem is once those price levels get established, someone with low income needs the program to survive.

Another point, it is impossible to simultaneously have a huge oversupply of housing, and an under supply of housing as is the case in Baltimore, unless you have a heavy degree of central planner manipulation.

Jaime-
I apologize for being a little less than sensitive in my previous observations. I love your blog.
Jason-
While I am not proud of having a racial bias, I don’t think anyone can genuinely say that they have 0 bias whether the subject is race or anything else such as gender or age. We all just have different degrees in which they propagate. Some wear hoods, some have the simple faux pas of assuming that someone’s spouse is of the same race in the absence of meeting them. In any case, I am certainly not afraid of the race police.

Josh- on point again. Well articulated.

I hate to say it but elwwedz has a point - there is definitely a “culture” issue that is rarely adequately addressed.

I’m a black male who moved to this area only few years ago I must admit that finding “decent affordable housing” in this area was definitely a big issue for me. I actually really love the charm and historic character of Baltimore but ultimately decided not to purchase a home in the city due to many of the same issues that elwwedz notes - ghetto/gang/fatherless children/illegal guns. Its not a PC thing to say but it is true. Who benefits from any of these things? I believe that a big part of the run up in home prices in this area was due to people (white, black and other) wanting to create homogeneous enclaves to escape “urban culture”. It sounds really bad but it’s true.

A good follow up conversation about property taxes would be the hidden water surcharge on your annual tax bill. Most just tender the tax bill to the mortgage co. for payment in July, however please look at the bill. If you re-landscape and plant trees that need watering for the first year or two, our blood sucking government adds a penalty for water use above what they consider normal.

Thanks DetectiveDick. To broaden the discussion even more it would be interesting to discuss hidden or even not so hidden"taxes" that are everywhere. I recently rented a car in Dallas and I paid more in taxes and fees than for the car rental itself. Is something wrong here?

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
Baltimore Sun articles by Jamie
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