[Chat] prop tax

Stephen J Gewirtz gewirtz at bellatlantic.net
Fri Jul 8 17:52:10 EDT 2011


Joshua is right about how the  taxes work.  Under the homestead tax law, 
if your home is owned by you and is your principal residence, your 
effective assessment (what you actually pay taxes on) can go up by no 
more than 10% per year compounded.  The 10% figure is used for state tax 
purposes (if you look at your bill, you will see that it shows both a 
City tax and a State tax).  And the counties and Baltimore City are 
allowed to use the 10% figure or to adopt a lower figure -- Baltimore 
City uses a 4% figure -- for local tax purposes.

If you look at your tax bill, it shows a State tax rate of 0.112% and a 
City tax rate of 2.268% of the assessed value of your house, and it 
gives the State and City taxes based on your assessment and based on 
those rates, as well as a total tax.  Those two numbers will be a lot 
less than they were last year because of the lower assessments.  Those 
numbers reflect what you would pay if there were no homestead tax credit.

The next two lines on the bill are a State assessment credit and a City 
assessment credit.  Those lines represent how much you are saving 
because of the homestead tax credit.  And the line after that is the net 
tax amount, which is how much you have to pay if you pay in August or 
September (you get your tax reduced by one half percent if you pay in July).

Let me take my own house as an example.  Six years ago, my house was 
assessed a little bit more than $83K.  Three years ago, it was assessed 
for a little bit more than $255K, i.e. it a little bit more than 
tripled.  This year, it was assessed for a little bit more than $178K.

So, six years ago, five years ago, and 4 years ago, I paid a tax on $83K 
of assessment (actually, I paid less than that. because the $83K was an 
increase over the previous assessment, and that increase was phased in 
over 3 years).  Then, three years ago, I paid an actual State tax based 
on an assessment of $83K * 1.10 and a City tax based on an assessment of 
$83K * 1.04.  And I paid an actual tax that went up similarly each of 
the following two years.  So last year, my actual State tax was based on 
an assessment of $83K * 1.10^3 =. $83K * 1.331, and my actual City tax 
was based on an assessment of $83K * 1.04^3 = $83K * 1.124864.  These 
figures were way below the actual assessment of $255K (actually, that 
$255K was phased in over 3 years, but the phase-in did not affect the 
actual tax)

For this year, my assessment went down to $178K (and an assessment 
decrease takes effect immediately rather than being phased in over 3 
years as an increase would be).  But my actual State tax is based on an 
assessment of $83K * 1.10^4 = $83K * 1.4641 = $121,520, which is much 
less than the actual assessment of $178K.  And my actual City tax is 
based on an assessment of $83K * 1.04^4 =. $83K * 1.17 = $97K, which is 
also much lower lower than the actual assessment of $178K.  The 
difference between a tax based on the actual assessment and the tax 
based on having the effective assessment go up each year by no more than 
10% for State tax purposes and by no more than 4% for City tax purposes 
is the homestead tax credit shown on the bill as State assessment credit 
and as City assessment credit respectively.

A useful figure is how long it will take your tax to double.  Your tax 
can double in x years, where x is the solution to the equation 1.10 ^ x 
= 2.  In other words, your State tax will double in 7.27 years (i.e. 
will almost double in 7 years, and will a bit more than double in 8 
years).  Your City  tax can double in y years, where y is the solution 
to the equation 1.04^y = 2.  In other words, your City tax can double in 
17.67 years (i.e. will almost double in 17 years, and will a bit more 
than double in 18 years).  One way to approximate this doubling time is 
to divide the annual percentage increase into 72. So, for example, State 
tax can double in approximately 72 / 10 = 7.2 years, and City tax can 
double in approximately 72 / 4 = 18 years.

And yes, Joshua is right about how the system can be viewed as unfair to 
someone who has just bought a house.  If mine had sold three years ago 
for its assessed value of $255K, the new owner would have paid a tax 
based on an assessment of $255K, i.e. would have paid roughly triple 
what I paid.  And this year, he would have gotten a sizable decrease to 
a tax based on an assessment 0f $178K, but still would be paying a lot 
more than I am paying.

Your assessment is what the assessor estimates that your house will sell 
for.  So without a homestead tax credit, you basically are taxed on what 
the State estimates that someone will be willing to pay for your house.  
What the homestead tax credit does is to give some protection to long 
term homeowners so that, for example, when the assessed value of my 
house tripled three years ago, my tax did not triple over 3 years (since 
the increase is phased in linearly over 3 years).  It enables long term 
homeowners to keep their houses when their houses become far more 
desirable to people seeking homes.

Steve

On 7/8/2011 2:48 PM, Joshua Fruhlinger wrote:
> OK, so I just looked at my own email and realized that was way too complicated an explanation.  Here's a simpler one:
>
> Your property tax bill is EITHER 2.268 percent of the assessed value OR 3 percent more than you paid the previous year, whichever is LOWER.   If you've lived in your house since before the property bubble, your assessment probably went up very fast in the mid '00s and then came down a somewhat (but not back to the original level) in the late '00s/early '10s.  So for many people, even if the assessment has gone done, a 3 percent INCREASE over your previous year's bill is still going to be LESS than 2.268 percent of that reduced assessment. Basically, the taxes you've been paying still haven't caught up to your assessment, and will keep increasing 3 percent a year until they do.
>
> (Note that I'm not sure if 3 percent is the exact value, but it's something close to that if not.  And this only applies if you live in the property we're talking about -- that's why it's called the "homestead tax credit" -- and if you were living in it the previous year.  The first year you own the house, youpay 2.268 percent of the assessed value, and that's your baseline going forward.)
>
> jf
>
> On Jul 8, 2011, at 2:13 PM, Joshua Fruhlinger wrote:
>
>> If you're getting a homestead tax credit, your tax can only go up a little bit every year (I think 3 percent) as long as you stay in your home.  But it will go up that amount until it hits the amount you'd pay without the credit.  After the housing bubble in the mid-'00s a lot of property's assessed values went up so fast that people with the tax credit never caught up.
>>
>> For instance:
>>
>> Say in 2006 the assessment of your house doubled from 100K to 200K.  Your theoretical tax would go from $2,268 to $4,356. But because of the homestead tax credit, your actual tax can't go up more than 3 percent a year.  So in 2006 you'd owe $2,336, in '08 $2,406, and in '09 $2,478.
>>
>> Then in 2009 they reassess your value down, from 200K to 150K.  Now your theoretical tax drops from $4,356 to $3,402.  But because of the homestead tax, you aren't paying anywhere near even that reduced amount.  So the tax you actually pay in practice in 2010 is still a three precent increase -- $2,552. Your actual tax bill would only go down if your house lost a lot more value -- if it were assessed at less than $112,500 or so, with these numbers.
>>
>> jf
>>
>>
>> On Jul 8, 2011, at 1:59 PM, jberlin wrote:
>>
>>> Have many people received property tax bills higher than last year even with the lower property assessment?
>>>
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