Benjamin Franklin summed up a common feeling about taxes when he wrote to French scientist Jean-Baptiste Le Roy in 1789, referencing the newly ratified U.S. Constitution: “(I)n this world, nothing is certain except death and taxes.” The quotation can be attributed to other sources throughout the course of history, but there isn’t much escaping the fact that it’s true.
In owning real estate, there are associated taxes, which vary depending on the location, how you use the property, its condition, size and more. Property tax and real estate tax are the same thing, and the terms used may depend on where you live or who is referencing the tax. The IRS, for example, typically uses “real estate tax” when referring to taxes owed based on property ownership.
How a locality determines property value differs by state, city and township, but real estate taxes are a very real part of property ownership.
The federal tax reform finalized in 2017 limited state and local property tax deductions to $10,000, when it used to be unlimited. As a result, much of our tax deductibility has been drastically changed, and some people are debating whether they would benefit from a move to reduce their property tax bill.
Before you move to lower your property taxes, Jodi Carter, a certified public accountant in New York City, recommends looking at the bigger picture.
“This change in the law sent people scrambling for solutions before they understood the implications. For example, if you can no longer deduct real estate taxes of $10,000, your overall homeownership costs may have increased by $2,000 to $3,000 per year,” Carter says. “Moving is a pretty extreme solution if that is the problem. It makes sense to consider a move if you are committed to lowering your overall costs, but to do so just to manage income taxes is not going to be an appropriate choice for most people. Focusing on the cost of the home, maintenance and, yes, property taxes, can have a significant impact on your financial life.”
As Americans consider their financial future in the midst of the coronavirus pandemic, a move to a new home with a lower cost of living — taxes included — may seem like a good idea. But is the upheaval of moving to a new city or state worth the savings in taxes?
If you are looking to lower your homeownership costs by moving, here are a few things to consider regarding how real estate taxes might factor in.
Establish Criteria That Are Important to You
One surprise that some people find in certain metropolitan areas is that the real estate tax rates are often much higher in the suburbs. Many people have come to accept the longer commute and the responsibilities that come with owning a single-family house in exchange for more square footage, fresher air, more green space and in some cases, high-quality public schools.
Indeed, the higher property tax can be offset by the savings that many parents find when they no longer have to shell out the dough for often jaw-dropping private school tuition — as high as $40,000 in some cases.
You may see the property tax rate vary significantly between two similar houses, maybe just a mile apart, because county, city or neighborhood lines in between create differences in the way tax funds are allocated to the local public schools. Homeowners without children or empty nesters who opt to move outside the bounds of a highly desirable school district may see their property taxes drop significantly while being able to maintain an otherwise similar style of living.
Move to a Town That Has a Lot of Local Business
There is something undeniably charming about living in a sleepy village where the most action is at the intersection of State and Main, with a handful of restaurants, an ice-cream parlor, a farmers market and an art gallery or two. But this means there may not be any large businesses helping to cover the real estate taxes. Especially when a suburban town is made up of primarily residential neighborhoods, there aren’t many businesses to pay commercial property taxes.
Towns with larger employers not only have the business to help support the tax base, but also the added employment opportunities for the local population, which in turn attracts more residents and can spread out property tax needs among more people.
“If you choose a town that has a big tax base, this helps to keep the taxes lower,” says Michael F. Levy, the principal broker of Grand Lux Realty, a real estate brokerage in Westchester County, New York. “This is why a house in Armonk might have half the taxes of a house in Scarsdale or Larchmont (just a few miles away).”
Buy an Older House and Renovate Instead of Buying New
When moving, you should weigh the pros and cons of buying something brand-new versus taking on a project and updating an older property. Aside from determining whether you have the bandwidth to undertake a renovation, the real estate taxes may play a bigger role than you thought in gauging that decision.
“Another thing that helps to keep taxes lower is increased development,” Levy says. In terms of real estate taxes, he says, “An old house might cost a third of a new house. This helps keep taxes down for everyone.”
Buying an old house with low real estate taxes and renovating it could be more cost-effective in the long run than buying a brand-new home on a comparable plot of land, since new construction is often assessed at a higher value than a similar existing property. If you stick to the basic layout of the old house and don’t move walls or add to the footprint, the permitted work likely won’t require a new tax assessment by the county or city.
Depending on where you live, the ability to schedule contractors to work on major renovations could be delayed by the COVID-19 pandemic. If you’re buying a fixer-upper that isn’t habitable yet, be sure to consult a contractor before you buy so you have a better understanding of the timeline and if it fits with your schedule.
Pay Attention to How a City Handles New Construction
How your local government reacts to new development can change the future of your property taxes. Sometimes a city government will place a moratorium on new development for a set period of time, which stops construction.
Since new development can add a lot to the tax base with high-value properties and new residents, “if a moratorium is placed on new development in a small town, then the taxes may significantly increase over the next year or so” to make up for the loss of revenue from new properties, Levy says.
To encourage new construction, a city may allow for a tax abatement for newly built properties. The abatements for ground-up development can be passed along to the new buyers with the understanding that real estate taxes would be increased on a predetermined schedule over a 10- to 25-year period. If you can take advantage of tax abatement on new development, that can be a great way to lower your real estate tax bill in the short term, but with the understanding of how and when that abatement will end.
Beware that for conversions, where an older structure is renovated and marketed as new, the property is often sold based on the real estate taxes of the previous structure, which was likely not the level of luxury it is now. The new owner can be assured of paying higher taxes as soon as the property is reassessed.
In general, real estate taxes can get complicated the deeper you delve. A local real estate agent or financial adviser can help you navigate how taxes might differ from town to town, or even neighborhood to neighborhood.
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Update 04/29/20: This story was published at an earlier date and has been updated with new information.