Going into buying a home, I had to wrap my head around a lot of things. There was finding the home itself, then the whole process of negotiating the offer, the mortgage, and then all the thoughts of what you want to do when you actually move in. A big part of the financial aspect of the purchase and mortgage is projecting your monthly payments. Property taxes are a significant part of this.
The thing is, even once you pay your mortgage down, you’ll still be paying those property taxes in perpetuity. In a state with high property taxes like New Jersey, it’s a sizable percentage of what you might pay in rent some other places. I was aware of property taxes. I assumed they’d be predictable and logical. Boy was I wrong.
Disclaimer: Per usual, I have to make clear that I am (obviously) not an expert on this topic. This piece reflects my growth from zero understanding, and hopefully underscores that you should get professional advice as you make your own financial decisions. Comments and corrections are very welcome!
Could you give us a lot more money, like, now?
In our case, shortly after we bought our house, it was reassessed for 30% more, leading to an equivalent property tax increase. Moreover, we were told that this increase would be retroactive for the year, inclusive of the 4 months we didn’t even own the house. This amounted to a surprise bill of more than $2300, due within about 6 weeks. Welcome to town, indeed.
So property tax is no joke. I had to go down the rabbit hole to understand how this works. I’m gonna get into some real numbers, because all of this is public record. Buckle up, because this is pretty wacky.
How it works
In New Jersey, the counties set the nominal property tax rate. In my county, Middlesex, this percentage is 2.31%. The word “nominal” is very important. It means that this is the base percentage you should be paying on the value of your property. But this is not the actual rate you see on your tax bill.
Properties don’t sell every year, but the tax assessor has to reassess some of them, anyway. They do this by trying to match the assessment values to comparable properties. Ideally these values would match the amount the property would sell for on the market. That’s what I naively would expect. But that’s not how it works.
Occasionally, a municipality reassesses every single property in its boundaries. This is called a revaluation. The outcome should be that the assessments match the fair market value. The problem is, this only happens every few decades. In my town, the last one was 1993. Because that’s the baseline, all reassessments have to be relative to fair market value in 1993.
Either the county or the state (not sure which) decides how much the average property was worth then compared to now. They call this the assessment ratio. In Metuchen, this is about 43%. That means all assessments done today should target 43% of what a house could sell for now.
As an aside, the county calculates a real tax rate by dividing the nominal tax rate of 2.31% by the assessment ratio. Mind you, I can’t figure out exactly how any of this works, but this means that we should be paying county taxes of roughly 5.2% on our assessed value — which, as you recall, is only 43%ish of the actual value of our house. Long story short, you frequently convert between 1993 numbers and today numbers to figure all this out. And even then, it doesn’t quite add up.
Back to our surprise tax hike
We paid $390,000 for our house. Our assessor put his finger in the air and said “your house and land assess for $190,000”. This was not a coincidence. It is 48% of what we paid, which he can assume to be fair market value. Actually, it’s about 45% of what the sellers originally asked. (All these numbers make me feel like I’m oversharing, but this is all right on Zillow.)
We can fight this thing, but we might not have a leg to stand on. You have to prove that there’s more than a 15% discrepancy between your assessment and fair market value (usually judged by comparables). We’re unlikely to find such a big discrepancy. According to Zillow, our house has already appreciated, to roughly what the sellers’ asking value was.
But something’s wrong here, right? A 30% hike is messed up, right?
The real problem is that our house wasn’t reassessed as the previous owners made improvements. They got years of soft taxes. Presumably, this is happening all across town. Long-time owners are paying soft taxes and new buyers are paying their fair rates. If everyone was paying their fair rate, there would be a budget surplus and we could actually reduce taxes.
It seems what we need is a town-wide revaluation. All properties need to be assessed at today’s market value so that everyone pays a fair share. As a bonus, we can stop having to think in 1993 dollars, which is absurd.