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.