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Real Estate Taxes

One of the certainties of home ownership is a relationship with your local tax assessor in which the money only goes one way--from your pocket to local municipality. Although there is a good bit of variation from state to state and locality to locality, it is nearly universal that if you own property anywhere in the United States or Canada, you will have to pay a real estate tax on it. In many localities, this tax is the municipality's primary source of revenue, providing necessary funds for education, police services and the like. Although they pay their real estate taxes faithfully every year (not that you have a choice, mind you), many homeowners are unsure of how the municipality arrives at the amount of tax and why there may be variances between one house to the next.

How the taxes are computed

The amount of taxes you pay will almost certainly be based on an assessment of the value of your house. This may be an estimate of its market value, or a percentage of market value, but the method of basing the assessment will be consistent throughout the community. Although the formula for computing the tax may be the same, you may find variances in the values of homes, even those located on the same block. This may be due to an honest miscalculation, or the assessor, who places the values on individual homes, may have been just a bit optimistic when placing a value on your house.

Generally, tax assessments are adjusted on an annual basis and notices of changes mailed to you. Obviously, it is a good idea to keep a close watch on the assessment value, since the amount of money that comes out of your pocket is directly tied to that valuation. A large jump in your assessment could be a reflection of a rise in market values in your neighborhood, but it might be an error. A good idea is to keep tabs on what houses are selling for in your area and compare your assessment to the average sold price (using houses similar to yours in size and condition).

Too High or Too Low?

Ideally, you would like to have your house assessment be as close as possible to its true market value. If the house is assessed too high, you pay higher taxes. If the house is assessed too low, you will save on taxes but this could hurt you if you attempt to sell your home. In many areas, listing and sales prices of houses run very close to their assessed value. Listing agents use assessed value as a guideline for listing prices, and buyer's agents use assessed value as a basis for a buyer's offer. If your assessment is too low, it could affect what could be an acceptable listing price, or it could result in a low offer from a buyer who was basing it on the assessed value.

You feel your assessment is too high. Now what?

The method of appealing a tax assessment will vary from locality to locality. In general, though, if you feel your assessment is not a true representation of the value of your house, you will need to contact the tax assessor to find out how to appeal or contest it. Unless it is an obvious oversight to which the assessor agrees, you will need to be prepared to back up your claim, whether it be by an appraisal or a comparative market analysis. (The comparative market analysis will document recorded sales of houses similar to yours). To make sure it makes good financial sense, you will need to compare the potential savings of the lowered taxes versus the cost of providing the documents (appraisal or comparative market analysis) you will need.

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