The Purpose of Property Taxation
Upon becoming a homeowner, you’ll be responsible for paying annual property taxes to the city. As a homeowner, you may be asking “why tax my land?”
Despite the drawbacks of taxing real estate, there are a lot of benefits that outweigh the perceived problems. Here are several reasons listed for you to review:
- Real estate taxes are a stable tax base making it easy on the city to administer
- Property taxes are predictable – cities can count on a steady stream of income from the time a property is assessed until its reassessed.
- Property taxes do no distinguish resident vs non-resident. All land is taxed so nobody is missed in the process
- Property taxes are somewhat protected in slow economies compared to other types of taxes
- Property taxes are the one single identifiable local revenue source for schools and municipalities, which makes local government directly accountable for performing its operations in a cost effective manner
As the municipality collects property taxes from the real estate owners in the city, the money goes towards many positive uses.
Some items the tax revenue gets spent on includes:
- Funding for the public school systems
- Maintaining roads and sidewalks
- City parks and playgrounds
- Police and fire protection
- Municipal services like sewer and street lights
Property Tax Exemptions
There are some exceptions as to who pays property taxes. Here is a list of the following entities that are given complete or partial exemption from paying property taxes:
- Government entities
- Schools, including colleges & universities
- Embassies or consulates
- Historic areas
- Religious organizations
For these entities to be given tax exemptions, they must be used for tax exempt purposes. If the city finds out the land is not being used for these purposes, then it gets taxed.
Property Tax Deductions
As a homeowner, your real estate probably does not qualify for an exemption, but one way to reduce your taxes is to take advantage of deductions. Property tax deductions vary by state but here are some common deductions you may qualify for:
- Homestead deduction
- Geothermal, solar, wind, or hydroelectric deduction
- Rehabilitated property deduction
- Historical rehabilitated deduction
- Veteran deduction
- Disabled person deduction
- Mortgage deduction
- Over 65 years of age deduction
Many homeowners are eligible for the homestead deduction and mortgage deduction. But if you meet any of these other qualifications, you should contact your city tax assessor office and inquire about getting these deductions from your property tax bill.
How to qualify for a homestead deduction?
In order to qualify for a homestead deduction, the property must be your primary residence. If you are married, you and your spouse are limited to just one homestead deduction.
When purchasing a new home, it’s important to consider these deductions because the current owner’s property tax bill will likely be different than yours. It’s a common mistake for new home buyers to see an old property tax amount listed and assume that it will be what you will pay also. In reality, your tax will be different.
What happens when you don’t pay your property taxes?
If you don’t pay your property taxes, your city tax assessor’s office will place a lien against the property. Alternatively, if you are buying a house that has a property tax lien you’ll be responsible for paying off this lien to clear it from the title.
Property tax liens have the highest order of liens. Therefore, any proceeds from a real estate sale will be used to pay this lien first before a lender can get any funds to pay off a mortgage lien. This is why lenders often want to open an escrow account where they can place funds from your mortgage payment that will be applied towards the property tax bill. It protects their interest in the property. So upon getting a mortgage on your home, you may sign a mortgage agreement where payments are set up to include principal and interest on the loan plus one twelfth of the year’s property taxes and hazard insurance payments. This is known as PITI (Principal, Interest, Taxes, Insurance).
A tax sale occurs when a tax lien is not satisfied and the local government taxing authority forecloses on the property. In other words, when a landowner defaults on tax payments, the money owed gets collected through tax foreclosures or tax sales. The municipalities goes to the court and takes title to the property for which the taxes are delinquent. The municipality may keep the property or dispose of it through tax sale to recoup the revenue it lost that goes towards the city’s budget to fund schools, parks, etc.
How does a tax sale work?
Tax sales are comparable to sheriff’s sales, which occur when a mortgagor defaults on his mortgage loan. After notice has been published, a tax collector conducts a tax sale. The purchaser must pay, at least, the delinquent taxes and penalties with the delinquency in order to take title to the property.
Once the property is sold to the highest bidder at or in excess of the minimum bid, the proceeds are used to pay any back property taxes, then the cost of the foreclosure (appraisers, transfer tax, auctioneer, etc.) and then the lien holders are paid in priority order. Any surplus funds go to the debtor.
The owner, and delinquent taxpayer, may redeem the property prior to the sale by paying the delinquent taxes plus interest as well as any penalties associated with the delinquency. When this occurs, it is known as an equitable right of redemption.
Every state differs but an example would be a state that has a 12 month statutory right of redemption period on tax sales. This means that the high bidder at the auction doesn’t actually get ownership or possession of the property at the time of auction. They receive a tax sale certificate which the defaulting owner may redeem by paying the high bidder the auction price plus a 10-15% interest rate depending on when they redeem it.
Again, this interest rate and redemption period will vary by state so be sure to check with your state laws.
If the owner doesn’t exercise their right of redemption within 12 months, then the high bidder may now obtain actual title through a tax deed. Most properties sold are redeemed during the statutory period.
A friend of mine was an investor and he would buy 5-10 property tax liens and after the 12 month redemption period passed by, he often would get title to a few of the properties for the cost of the tax lien. It was a great way for him to acquire 3-4 properties for $10,000 to $15,000 combined depending on how much property taxes were owed on each property.
Every case differs though but this is an example of how you can own a home for cheap if the debtor doesn’t redeem during the statutory period.
Overall, when you are shopping for a new home you should always check for any liens on the property. Liens can impact the sale of the property and you may be responsible for paying for these liens when you take title to the property.
Final note: Your real estate agent may not be able to answer some of your questions due to legal issues that could arise from wrong information, so one of the first places you should go to get questions answered related to property taxes is the city tax assessor office.
Contact Kevin Foy, RE/MAX Excellence
Kevin is a real estate broker-associate with RE/MAX Excellence in Elkhart, Indiana and has served real estate clients for over 35+ years in Northern Indiana and Southern Michigan.
To get a hold of Kevin for real estate services:
- Phone: 574-536-9218
- Email: Kevin@TeamFoy.com
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