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These taxes are unlike most that we pay day-to-day. Rather than being attached to your social security number (employment) or an individual item that you walk out of the store with (sales)—property taxes, as the name suggests, are attached to the property. This creates a unique issue when you buy a home—if the previous owner has unpaid property taxes, those costs could be passed on to you.
Property taxes are evaluated by an assessor and levied at the individual county and/or city level. These fees generally go to pay for public schools, utilities, and other local miscellaneous costs. Tax rates vary widely and are annually calculated as a percentage of your home’s assessed value.
For example, a house with an assessed value at $350,000 in Chicago would have an effective tax rate around 2.009% or $7,032. However, if you owned a home assessed at $700,000 in Los Angeles, the rate would actually be less at .793% or $5,948 per year.
As mentioned above, you can be held liable for unpaid taxes from a previous owner. Furthermore, if left unchecked and unpaid, all or a piece of your property can be sold by the government at auction, leaving your investment open to the highest bidder.
Recently in an upscale neighborhood in San Francisco, two investors literally bought the street and sidewalks out from under the residents. The private road was put up for auction due to a “$14-a-year property tax bill that the homeowners association failed to pay for three decades.”
The street, which is lined with “35 megamillion-dollar mansions”, was sold for $90,100 to two South Bay investors, due to a $994 in back taxes and penalties. The new owners had several ideas for how to capitalize on their investment, including charging longtime residents and homeowners to simply park outside their door. A change like this could disrupt the property value of an entire neighborhood.
The locals cried foul—alleging that this was a clerical error resulting in the city/county bills to the wrong office location for years, among other things—and eventually won the private road back. However, the whole process took over two years to resolve and was fairly controversial.
In this instance, the bank or lender will require that the borrower buy title insurance to complete escrow. Title insurance protects the buyer and lender against unforeseen claims or “clouds” on the title, such as unpaid property taxes.
Even if you do purchase title insurance, it’s still important (as illustrated above) to be a diligent taxpayer and keep up to date on your property taxes. If you find an unforeseen bill, file a claim with your title company and clear up the charges before it’s too late. Staying up to date and informed on local government tax guidelines can also result in finding helpful tax credits, tax deductions, tax relief opportunities, and exemptions based on your income. Find your local property tax authority and additional tax advice here.
Buying a home will most likely be the single largest purchase that you make, and getting slapped with an unexpected tax bill or having part of your property auctioned can cause unwanted financial whiplash. Understanding the way property is transferred, taxed, and regulated is a crucial component to making a sound, savvy, and lasting real estate investment.
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