Property Tax Considerations For The Prepared Homebuyer

You’ve got to give credit to the taxman (or, more formally, the Multnomah County Division of Assessment, Recording and Taxation (DART)) for being seasonally appropriate: property tax bills are mailed the third week of October every year, so you might get something spooky at your door soon.

Of course, Oregon property taxes are not a joke, are a complex issue, are politically divisive, and, many would argue, are overdue for reform. For all of those reasons, I don’t want to wade too deeply into this topic here, but I do want all of my buyer clients to consider four things in order to be prepared when it comes to property taxes.

Myth-busting

First, let’s debunk two myths about property taxes upfront: taxes aren’t strictly limited to just a 3% increase year-over-year, and, property values are not assessed automatically upon sale and transfer of property.

While the Oregon Constitution limits the rate of growth of property value that’s subject to taxation, by preventing the maximum assessed value to increase more than 3% per year, there are exceptions: changes in the tax rate for your area, the loss of savings that comes from compression, or an “exception event.” These exception events include, but are not limited to, the following:

• New construction, additions, remodels, or rehabs of more than $10,000 in one year or $25,000 over 5 years
• Partitioning, subdivision or rezoning of your lot
• Discovery of omitted property [more about this below]

Note that general ongoing maintenance and repairs, such as replacing a roof made with the same quality materials as the original roof, do not qualify as exception events and are therefore exempt from these improvement figures.

Lag time

Buyers are drawn to homes that have recent improvements– whether it be a kitchen remodel, fresh bathroom renovation, ADU conversion or something else. Undertaken professionally and with attention to detail, these types of improvements add desirability, livability and value to every home.

As noted above, if the value of these improvements are greater than $10,000 in one year, or $25,000 over 5 years, and if these renovations were completed properly with permits filed with the city, the tax assessor will be aware of these improvements. It can take some time for these improvements to be reflected in the taxable assessed value of the home, so when you’re looking at homes with new renovations, know that the current property taxes are likely to increase in the coming years.

As a buyer, it’s important to take this future increase into account when figuring your monthly PITI – principal, interest, tax and insurance – payments on a new home and how that affects the affordability of that home for you. (And, as always, consult with your mortgage broker about the specifics of your financing.)

Buying power

Consider this idea: $1,000 in property taxes equals roughly $15,000 in buying power.

One thing I always counsel to my buyer clients is to consider how property taxes affect the affordability of a home. For reasons more complex than we can talk about here, similar houses don’t always have the same property tax totals. Therefore, when shopping for homes, it’s important to look at what the property taxes are for each house and to give those taxes as much consideration as the listing price when it comes to your financials and assembling an offer.

The reason that $1,000 in taxes equals approximately $15,000 in buying power is because it will cost ~$83/month to pay for those taxes. With current mortgage rates, that $83/month could instead be applied towards paying for an additional $15,000 in your mortgage.

So, if you have a house with lower tax bills, you can potentially qualify for a larger loan and offer more, while keeping your monthly PITI the same as another house with higher taxes. This provides you greater leverage as a buyer. (Again, always consult with your mortgage broker about the specifics of your financing.)

Omitted Property

Special note on improvements made without permits: counties aggressively seek information on properties that, according to the existing tax records, may have “omitted property” – property or value that is omitted in error from the tax records due to clerical errors or newly discovered upgrades and/or additions (unpermitted improvements may go unassessed for years).

County tax assessors often become aware of omitted property at the time a home is being marketed for sale. County assessors are members of the RMLS, hire people to watch the RMLS for new listings that have trigger words about improvements, they track sales prices, and other information to search for indications that remodeling has taken place or other signs that properties are under-assessed. If the assessor finds omitted property, they notify the current owners and add the property to tax rolls. The law allows them to assess the property for up to five years previous and the current year, a total of six years. Once omitted property is added to the tax rolls, the assessment becomes a lien on the property.

Bottom line: you can be liable for omitted property for a home you just purchased, even though you weren’t responsible for making the improvements and the improvements were made years ago.

I work to prepare my buyer clients in this situation by helping them review the permit history of the property against any improvements we’re seeing when viewing the house in person, obtaining any relevant invoices and repair history paperwork from the sellers, and reviewing the title report for ‘omitted property’ (and other) liens. These steps aren’t bullet-proof, but they can go a long way towards protecting the buyer’s interests.

Please know that I am not a tax professional and cannot give advice regarding actual omitted property tax assessments.

Header Image Credit: The Beatles

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ANDY MEEKS
Living Room Realty

Licensed Oregon REALTOR® | Earth Advantage Broker
andy@livingroomre.com | 971.400.0195 | PDX

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