Don't Sit Still in the Face of Rising Property Tax Rates

There's nothing quite like owning your own space, right? Whether it's a 20-room palace perched on a cliffside by the sea, or a shoebox tucked in a basement near a bustling city street, it's yours! But there's no doubt that the rising price of home ownership is placing hardship on rich and not-so-wealthy alike.

Property Tax Pressures

Mortgage rates, which are hovering around 7% (above 6.5% now for over a year) have made home affordability difficult enough, and now property tax increases are piling on.

A major culprit involved in these increases is that median home prices in many areas keep climbing due largely to inventory problems. Folks are clinging to those low mortgage rates of yesteryear or are hanging onto homes that they own free and clear. It makes sense to me.

According to ATTOM, a real-estate data analytics company, property taxes for residential properties rose 6.9% in 2023 compared with the prior year – the  largest increase in half a decade – and nearly double the increase in 2022. This equates to an average “carrying cost” increase on a single family home of over $4,000 in 2023.

State of Property Tax Rates

Property taxes are set by localities (cities, counties and school districts) per the revenue requirements of various taxing entities and are assessed based on property values. Rates vary significantly depending on location, but the effective national property tax rate is 1.11%, according to The Motley Fool.

Not surprisingly, the highest median property tax rate is New Jersey’s 2.46%. So-called “low-tax-Texas” ain’t all that low, waltzing in at 1.9%. But one reason for the Lone Star State’s high rate is the absence of a personal income tax (Texas also has a taxing 8.25% sales tax). Two of the lowest median property tax rates are assessed by Hawaii at 0.29% and Alabama at 0.43%.

The amount paid by homeowners is a function of the assessed property value as well as the rate itself. Residential property values are typically reassessed every one to five years depending on location, often based on recent sales of comparable homes, current local market conditions, recent home improvements and home replacement costs. Logically, a homeowner’s tax bill should be a simple percentage of the home’s value, but assessments often vary based on the sale of a property – and a duke's mixture of those other factors – that trigger reassessments.

The main reason property taxes have gone up in recent years is that home values across the country have skyrocketed. Nationwide, home values rose 5.3% between March 2023 and March 2024, according to CoreLogic, a property data analytics firm. General inflation (too much money chasing too few products) and escalating public school budgets in rapidly growing areas are also culprits (property tax is THE prime source of revenue for school districts).

Homeowners in larger communities often have lower property tax rates due to a larger pool of taxpayers and the likely presence of a bigger commercial tax base. More collections from businesses often result in fewer collections from homeowners. Residents of areas with declining populations (New York and California are examples of states losing population) just may face a property tax spike in the near future.

It may not seem like you have any control when it comes to property taxes, but you do have options.

Appraisal Check

It pays to keep an eye on property tax assessments because of the myriad ways a property’s valuation might be determined, e.g. recent comparable sales, market conditions, or blanket reassessments made by some jurisdictions based on changes in average sales prices. In large neighborhoods with a broad range of home values, lower-end homes can be overvalued, and higher-end homes can be undervalued.

Here's what you can do:

Most local tax offices have a “residential assessment ratio” that compares the average ratio of assessed values to current market values. (Note: Tax assessments are related but seldom identical to appraised market values.) Savvy homeowners can obtain an appraisal of their property or compare it to similar recently sold homes to establish the current market value and compare it to the assessed value. If the homeowner’s ratio is higher than the average ratio in a given location, the homeowner is a likely candidate for a successful tax appeal…a potential tax reduction. Despite tax assessment complexities (based on varying neighborhood data), professional tax assessors strive for fairness in the valuation of comparable homes in the same neighborhood.

Exemptions & Discounts

All homeowners should ascertain their potential eligibility for property tax exemptions (the exclusion of a flat amount or a percentage of a home’s value from a property tax assessment).

Homestead or primary residence exemptions are common – and in some locations, automatic. Many states reduce taxes on a homeowner’s primary residence to encourage individual homeownership versus investor ownership. Other exemptions or discounts are often available for elders, veterans, disabled owners, and increasingly for “green” homes with solar panels and water conservation features.

Here's what you can do:

On occasion, certain exemptions are automatically applied, but in most instances homeowners need to proactively check the application process in their locations to determine eligibility. Be proactive in this regard. The savings could be considerable.

Property Tax Appeal

Tax assessments are typically mailed to homeowners annually, but folks can check their tax assessment status on county appraisal district websites. Tax Assessor jurisdictions have a published process for appealing a tax assessment with specific deadlines after assessments are issued. Homeowners typically must appeal within a certain timeframe after they receive their tax assessment. The process can be intimidating. Those most likely to appeal are homeowners who pay their property tax bills individually versus with a mortgage payment because they’re usually more aware of the bill. Also, folks with higher incomes and higher levels of education are more likely to appeal, as are older folks on fixed incomes and/or who have more time to bother with what can be a laborious process.

Here's what you can do:

In a mortgage payment situation, check with your lender. You may be able to pay your property tax bill individually, which also gives you control of your money since it isn’t held in escrow by the mortgage company. But beware. This involves due diligence on your part to save for the ultimate billing. Forgetting could trigger large tax penalties or even a nettlesome lien on your property.

Refunds for previous tax bills are possible, but usually that’s because of a missed exemption rather than an incorrect assessment. Homeowners can hire a local lawyer, a tax appeal service, or appeal on their own. Homeowners who use a tax appeal service will likely be charged a one-time 25% to 35% of that year’s tax savings if an appeal is successful. But an added benefit is that a reduced valuation continues to reduce property taxes in subsequent years.

By the way, homeowners should also be diligent about keeping an eye on rapidly escalating insurance premiums which have been rising along with home values, but that’s a topic for later discussion.

A Gentle Reminder

I’m disheartened by the fact that about $17.5 TRILLION of your money still sits in commercial bank vaults. The average bank savings account currently earns about 0.45% in interest per year, according to the FDIC.

Good grief! Money market accounts and short-term Treasury bills have been earning 5.0%-plus for many months. What’s the deal? You’re not just losing the difference between 5.0% and 0.45% in interest income, your savings account spending power is being mauled by the worst inflation in years. No wonder your friendly neighborhood banker loves you. One percent of a trillion dollars is $10 billion. So collectively, on an annual basis, your dithering is ceding something on the order of $175 billion of foregone interest to your friendly banker.

Always, always be on the lookout for ways to save money and earn more on the money you have!