Financial advisors counsel clients on income, estate and gift taxes among other things. But they often neglect residential property taxes. That could well be a mistake.
Property taxes are a significant cost of owning real estate - typically 1 percent to 1.5 percent of market value. So, they must be considered in making financial decisions. They can also be a significant cash-flow consideration for someone in retirement who has a lot of illiquid wealth-not just for your primary residence, but your second and third homes as well.
Did you know it's possible for you to get property taxes cut if your homes are assessed unfairly or inaccurately-or if you're eligible for certain exemptions? But first, you must understand whether the stakes are high enough and how property taxes are calculated.
The highest property-tax states are concentrated in the Northeast, according to 2004 U.S. Census data. They include New Jersey, Connecticut, New Hampshire, the District of Columbia and New York. Per capita, New Jersey residents paid $2,099 annually vs. the $1,086 national average. The cheapest state, at $367, was Alabama.
In terms of percentage of personal income consumed by property taxes, Maine (5.48 percent), New Hampshire (5.1 percent) and New Jersey (4.83 percent) are the most expensive.
All across the country, people are complaining about their property taxes because they're going up. Nationally, property taxes rose by more than $100 billion-roughly 40 percent-from 2000 to 2005, according to the census data.
These tax increases are largely attributable to rising property values. The Indianapolis-area real estate market hasn't increased in value at the rate of some hot spots the last few years, but it hasn't decreased, either. The location of your vacation home, however, may be seeing a decline in property values.
Property taxes are a function of two numbers: First, the assessed value of the property, and second, the tax rate per $1,000 of the property's assessed value. The exception is in Indiana, where no one seems to know how to calculate our property taxes. Most local governments are slow to reduce tax rates when property values are increasing, because they get more revenue without raising tax rates.
Some states do limit these stealth increases in property taxes. Property taxes only rise if they are allowed to under existing laws (not subject to statutory or constitutional limits) or if legislators at the local or state level do not adjust them along the way.
If housing prices level off, will property taxes follow suit? In my opinion, it's not likely because the costs of municipal and county services, face unprecedented pressure from the rising costs of employee health insurance, gasoline and meeting the unfunded requirements of the federal "No Child Left Behind" law.
Of course I am all for having services and educating our children. But with more increases coming, it's important that you pay no more than your fair share of property taxes. Up to 60 percent of all residential properties nationwide are over-assessed, and studies have shown that although less than 2 percent of assessments are appealed, usually 75 percent to 90 percent of all appeals result in a reduction of taxes.
A simple suggestion: Start by checking the accuracy of their property tax record. For example, does it list four bedrooms for a house that only has three? That kind of mistake is easily corrected.
Next, research the state's regulations about how specific types of construction and materials should be valued. The American Homeowners Association publishes "The Homeowner's Property Tax Reduction Kit," an 86-page guide with state-bystate regulations and contacts.
Homeowners can delve into the nittygritty of the mechanical characteristics and defects of their property. For example, a property assessment may be reduced due to flood damage, zoning changes or the declaration of a nearby area as a hazardous waste site.
Property tax exemptions are also worth investigating. Depending on where you live, you may be eligible for exemptions that reduce property taxes paid by the elderly, veterans and families with a member stationed overseas as well as owners with certain agricultural uses on their property.
Depending on the state your home is in, your property may be reassessed for tax purposes every one year to 10 years. Typically, there's a deadline by which you may file a challenge for reassessment. Remember, assessments are an art, not a science, and your local assessor should want your assessment to be fair.
Other states are concerned about the reliance of education on property taxes. Ohio now gets funding from sales taxes, while Michigan uses a combination of sin taxes. Sure, your kids may be grown or do not go to the local schools. But the kids that do will be the ones that ultimately have to pay off the U.S. debt-not to mention pay your Social Security benefits. So be fair, it is not always just about the money you save today.
Coan is managing partner with Wealth Planning & Management LLC an Indianapolis-based investment advisor, and author of "Asset Protection and Wealth Preservation." Views expressed here are the writer's.