Answers To Basic Real Estate Investing Questions

Not necessarily. In most places in the US, there are two ways the amount you pay in property taxes could increase. The first way can be done every year, the second, generally only every few years.

The first way your property taxes could increase is done by your local property property taxing authorities. You will likely have at least one of these authorities but could have several. These taxing authorities could be a city council or a county commission. They could also be a board responsible for some type of public improvement or service. Fire management districts, water management districts and sewer and water boards are good examples.

Each of these property taxing authorities is authorized to levy a tax on all real estate within their jurisdiction. They do this by setting an annual property tax rate, usually when they pass an annual budget. These property tax rates are often expressed in terms of a dollar amount per $100 of a property’s assessed value. For example, if your property is assessed at a value of $100,000 and a property tax rate is set at $1.00 per $100 of assessed value, then your annual property tax amount will be $1,000.

$100,000/$100 = 1,000 — 1,000 x $1.00 = $1,000.

These property tax rates can be raised (or lowered) every year. Thus, if the tax rate is raised to $1.50 per $100 the following year, your property tax bill would increase to $1,500.

$100,000/$100 = 1,000 — 1,000 x $1.50 = $1,500.

The second way your property taxes could increase is if the assessment, or value, of your property is raised. All property taxes are supposed to be based upon the “fair market value” of the property. Somebody however has to determine what what “fair market value” is and set it for all of the property taxing authorities to use. That person is usually an elected property assessor. The property assessor for each jurisdiction examines the local real estate market and assesses a value for every parcel of property. The property assessor would be the one that sets the $100,000 value in the above example.

These property assessments are usually not permitted to be done every year. Thus the value of your property (and your property tax bill) cannot be raised every year in this way. In my jurisdiction for example, a reassessment is permitted by the property assessor only once every four years (Of course when a building is built, added on to, or the property is sold a new assessment may be allowed in between that assessment period).

Thus if your property is located in a robust real estate market and was valued at $100,000, it may be reassessed to $150,000 the next time assessments are permitted. Assuming the property tax rate per the above example stayed the same at $1.00, you would experience an increase in your property tax bill due to the increased assessment amount.

$150,000/$100 = 1,500 — 1,500 x $1.00 = $1,500.

Assessments may not always go up however and tax rates are not raised every year. I had several assessments reduced after the real estate crash in 2008/09. Properties simply lost value and the property assessor was required to reflect that in their 4-year reassessment. My tax bills actually went down in some cases due to the real estate crash. Plus, political bodies do not like to make the public too angry too often with tax increases, so they often do not raise rates every year.

When your property taxes do increase there is usually not much you can do about the property tax rate increase except make a protest at a public meeting or write a letter to a city councilperson. But you can often challenge a property value assessment if you feel it is too high. Contact your local property assessor for more information.

Kevin Perk is the founder and publisher of Smarterlandlording.com.  He is the author of Advice From Experience To New Real Estate Investors.  Subscribe to Smarterlandlording here. Contact Kevin here.

A landlord has to pay all kinds of taxes, including taxes for property and on income. Property taxes are one of those unavoidable expenses that come with owning property here in the US. So yes, those taxes have to be paid.

The property taxes you pay are however considered an expense that is deductible from the income a property produces for income tax purposes. A simple example will help illustrate.

Suppose you own a house that generates $1,000 per month in rent. Total income for the year (assuming no vacancy) would thus be $12,000. Suppose further that your insurance cost $500 per year, mortgage interest for a loan on the property totaled $4,000 (principal payments are not considered expenses), maintenance and repairs totaled $1,250, property management was $1,250 and property taxes were $2,000 for total annual expenses of $9,000. Thus, $12,000 less $9,000 is $3,000. This $3,000 is your income (aka cash flow or profit) for the property for the year. This $3,000 is the amount used to calculate your income tax.

As this example demonstrates, you do not calculate your income tax based on the total amount of rental income. Instead you are allowed to deduct qualified expenses from that income, of which property taxes are one.

There are other deductions such as depreciation, car mileage and office expenses that come with owning real estate which I did not touch on for reasons of simplicity. Taxes can be quite complicated, so please understand that I am only a real estate investor and not a CPA. Consult a trusted, professional adviser for more advice.

Kevin Perk is the founder and publisher of Smarterlandlording.com.  He is the author of Advice From Experience To New Real Estate Investors.  Subscribe to Smarterlandlording here.  Contact Kevin here.