Don't get surprised by this property-tax rule
Maryland caps annual property-tax increases for people who live in their homes. But there's an exception for sizable home improvements -- and you really don't want to find out about it after you're on the hook.
Normally, the state's Homestead tax credit kicks in once you hit your second July 1 in your property. That means your property-tax bill can increase only up to a certain amount every year -- 4 percent in Baltimore and Baltimore County, for instance. (Full list here.)
But if you've made more than $100,000 in improvements to the property, the Homestead cap doesn't shield you from the taxman. Even if you didn't make the improvements yourself but instead bought a recently spiffed-up home that the state hasn't already reassessed, you could end up with a sizable tax hike a few years down the road.
That's the sort of thing you want to budget for. Here's how the exception works:
The $100,000 threshold has been in place since 2009, when it was increased from $50,000. New appliances, interior decorating and the like doesn't count: "We look at the cost of constructing those things for which one needs the building permit," says Robert Young, acting deputy director of the state Department of Assessments and Taxation.
So, let's say your Baltimore home is assessed at $90,000 and you add $110,000 in improvements. When the state picks up on that change, it reassesses your home at $200,000.
You get to keep the Homestead credit you amassed on the original portion of your home, but you don't get it for the new stuff. That means a big increase in your tax bill, rather than a 4 percent rise.
If the city forwards copies of your building permits to the state assessors, they'll come out and revalue your property then. Otherwise, they probably won't account for the change until they're in the neighborhood for the once-every-three-years reassessment that each home gets.
There's some phase-in of the extra value assigned to the home-improvement work, but it's done in such a way that there's not likely to be much difference between the full value and what you're taxed on in the first year.
"The bottom line is that if you add more than $100,000 in new improvements to an existing property, then you are going to end paying taxes on most of that new improvement value because you receive a new base assessment," Young said.
His advice: If you're going to do big home improvements, calculate the tax impact first and make sure you can swing it. "If you’re adding $100,000 of extra value, then figure on a couple thousand dollars extra in city taxes," he said. (You can find the various local tax rates here, with a Wonk post about them here.)
What about if you're thinking of buying a recently improved home? Do some legwork before signing on the dotted line. Look at the assessed value. Is it a lot lower than your expected purchase price? It's a good bet that the state hasn't accounted for the new construction yet.
If you have any reason to doubt, you can call the local office for the state Department of Assessment and Taxation and ask if staffers there have sent out a new construction notice on the property. If not, count on a higher tax bill than the current assessment would suggest.
"Even when you're buying a home now, when the market prices are declining, you really need to see, what's my actual tax bill going to be?" Young said.
One city homeowner who bought a rehabbed home in 2006 says she could no longer afford her mortgage payments once the assessment was adjusted and her taxes spiked. Wonk reader MCG was similarly surprised by a big jump in his taxes, though fortunately he did not end up in foreclosure as the other resident did.
"Nobody told us at closing -- my Realtor didn't tell me, 'Oh yeah, they can reassess your property based on the value of the improvements,'" MCG said. "It put a dent in my budget. I was able to handle it, but I could understand how somebody could end up being foreclosed in that situation."
So please pass on the word to people in the market to buy or to do big home improvements. Always good to be forewarned so you can plan accordingly.
While we're at it: Remember that Baltimore has several tax credits, good for five years, that you might be eligible for if you improved your home or bought a newly rehabbed (or constructed) place. Links here:
1. Vacant dwelling property tax credit
2. Home improvement property tax credit
3. Newly constructed dwelling property tax credit
UPDATE: Wonk reader Cory reminded me that people renovating homes in historic districts can be eligible for tax credits, too. Here's Baltimore-centric information.
Categories: Homestead Property Tax Credit, Property taxes, Resources for new buyers & owners
Sign up for the At Home newsletter 
Comments
Baltimore will never see a complete redevelopment of its communities until it cuts its property taxes to levels near surrounding counties. Why would you move into a crime ridden poverty stricken city only to pay high taxes for the experience? It's best to stay out of the city, tax the higher mortgage for a better quality of life over the higher tax bill and lower quality of tax. Baltimore city is not a welcoming place for new homeowners either; everything costs a great deal here. Think of taxes, water, city added electric fees, city added cable fees, unfortunate tickets, gas to travel to outside the city for shopping, car insurance, car maintenance, ect ect ect....Thinks before buying in Baltimore city, it's not just the taxes buy everything combine costs hundreds more a month in the city.
Posted by: ab | December 8, 2010 11:23 AM
Thanks Ab,
Now I'll never get my place sold.
Posted by: rick | December 8, 2010 11:56 AM
"Look at the assessed value. Is it a lot lower than your expected purchase price? It's a good bet that the state hasn't accounted for the new construction yet."
What's your idea of "a lot lower"? 30k? 130k?
Posted by: Jeff | December 8, 2010 12:12 PM
Jeff, for purposes of avoiding nasty surprises, you might want to call up the state even if the difference is $20,000. But that's really being cautious, since you need an improvement of more than $100,000 to get caught by the exception to the Homestead cap.
Posted by: Jamie Smith Hopkins | December 8, 2010 12:24 PM
I have never been so fond of my not-at-all renovated house as I am right now.
Is there any sort of requirement that real estate agents disclose this sort of stuff to potential buyers? What a nightmare!
Posted by: Mary | December 8, 2010 2:09 PM
Any real estate agents lurking who could answer Mary's question? I don't know of a requirement.
Posted by: Jamie Smith Hopkins | December 8, 2010 2:50 PM
Cool, thanks for the advice, Jamie!
Posted by: Jeff | December 8, 2010 4:10 PM
I wasn't aware of the vacant dwelling property tax credit. thank you!
Posted by: Michelle Brown | December 8, 2010 4:42 PM
Jamie,
You forgot to mention the property tax credits and assessment freezes that are avaialble to property owners in designated historic districts in both the City and several surrounding counties.
The City's program is administered by the Planning Department and freezes a homeowner's assessment at pre-rehab levels for 10 years PROVIDED that the owner applies for the credit in advance and that all work is approved before it begins.
http://www.baltimorecity.gov/Government/BoardsandCommissions/HistoricalArchitecturalPreservation/TaxIncentives.aspx
Baltimore County, Prince George's County, Montgomery County, Carroll County, Frederick County and several others all have similar assessment or true property tax credits for owners of historic homes and commercial properties. These credits are in addition to the income tax credits offered by the State through the Maryland Historical Trust.
Posted by: Cory | December 8, 2010 5:00 PM
Excellent point, Cory -- thanks!
Posted by: Jamie Smith Hopkins | December 8, 2010 5:02 PM
Once again... a fixed percentage of the SALE amount for a fixed number of years. All laid out and known in advance, no surprises, no need to even do assessments on all but exceptional (residential) properties.
Isn't the Governor looking to eliminate some jobs?
1% would be fair in most metro areas.
10 years would "catch" enough natural turnovers that the neighborhood mixed average would be workable.
Posted by: MrRational | December 8, 2010 7:26 PM
There is no requirement to disclose this to a buyer, but a good buyer agent will look for exactly what Jamie mentioned - a low assessment and high sale price - as a warning sign, as well as any indications that major improvements have been made.
Posted by: John K. | December 9, 2010 8:56 AM
Why is the entire 110k taxed in the above example, rather than the amount over the 100k exemption, 10k? Seems unfair to me.
Posted by: GD | December 9, 2010 9:55 AM
GD, certainly a big tax difference between $90,000 in improvements and $101,000!
Posted by: Jamie Smith Hopkins | December 9, 2010 11:23 AM