Real Estate Guide

Home Ownership - Questions and Answers
'Property Taxes'

• How do property taxes work?
• How is a home's value determined?
• Where can I learn more about appealing my property taxes?
• Can the amount of my real estate tax change every year?
• Why didn't I receive the Homestead exemption?
• How are real estate taxes used?
• Are property taxes unconstitutional to fund Ohio schools?
• Are property taxes deductible?
• Are taxes on second homes deductible?
• What is an impound account?
• Do all loans require impound accounts?

How do property taxes work?

Property taxes are what most homeowners in the United States pay for the privilege of owning a piece of real estate. On average, the tax amounts to about 1.5 percent of the property's current market value. Property tax  on real estate in Ohio is usually assessed and billed at the county level. It is made up of up of two (possibly three) separate components

1. The Improvement or building value,
2. The Land or site value.
3. In some states, personal property may also be included in the assessment. ( Not the case in Ohio)

A tax assessor is a public official who determines the value of real property for the purpose of apportioning the tax levy. This is usually done in Ohio from the office of the county auditor. Your actual tax bill will usually come from the county's treasurer's office. In Ohio, you will receive a property tax bill from your county treasurer's office every six months.

It’s important to note that the county will bill you ‘six months in arrears’, meaning that you pay last years property taxes, this year. For example: If you live in a home from January 1, 2007 to December 31, 2007, you will get a tax bill in January of 2008 for the first six months of 2007. In July of 2008, you will get a tax bill for the second six months of 2007. Note that if you pay your July statement and sell your home on September 15, 2008; at closing, you will still owe taxes for the first six months of 2008 plus July, August, and 15 days in September.

For the buyer of this same home, it’s very important to know how the sellers tax bill is reconciled at settlement. The escrow officer will NOT actually pay the county treasurer's office as many buyers think.  The escrow officer will calculate the taxes the seller owes (in our example, from January '08 thru August '08 plus 15 days in September).  He will then deduct the seller's tax bill from the seller’s proceeds of the sale and credit the buyer this same amount. This transaction will clearly be shown on the HUD-1 statement given to both the buyer and seller at closing. The HUD-1 statement outlines by whom, or to whom, every penny in the transaction is paid or earned.

After the buyer takes possession of the  house he will receive his first property tax statement in January of 2009. That statement will cover the first six months of 2008. Because the buyer, you, didn't move into the house until September of 2008, you may think a mistake has been made and assert, "The seller should already have paid these taxes!"  He did pay them. He paid you. You were credited the taxes owed for this period at closing. You, the new owner, must now pay this bill when it actually comes due. Because many buyers don't have a clear understanding of the procedure, they are caught short of funds. Make sure your closing agent explains in detail how property taxes are handled, and what your responsibilities are.

If your taxes are included in your monthly mortgage payments, your lender will keep the tax portion of each payment in an escrow account sometimes called an impound account. The actual tax bill goes to and is paid by the lender. The homeowner will receive an annual summary statement from the treasurer. This can be used to claim your property tax deduction if you itemize your federal tax return.

The actual assessment of individual  real property is done by an appraiser called an assessor. How much you owe depends on the taxable value of your property. In Ohio, it is typically 35% of what the tax appraiser says is fair market value of the land and all the improvements. Fair-market value reflects the quality of your property and what similar properties in the neighborhood have recently sold for.

Assessments are renewed in most jurisdictions, usually, at 3, 4, or 5 year intervals. The new assessment can be appealed by the individual property owner and will made subject to an administrative or judicial review. Your actual tax bill will be determined by applying the tax rate to the assessed value, plus levies approved by voters in the jurisdiction. The tax rate can vary from community to community and from school district to school district within the same county. The taxes collected pay for schools, police, fire stations, hospitals, garbage disposal, sewers, road and sidewalk maintenance, parks, libraries, and various other miscellaneous public service expenditures. Levies are stated in mills. A mill is $1.00 per $1,000 in assessed property value.

Periodic revaluation of property taxes answers the question of owners of new homes paying taxes on outdated values, however it creates the situation of older retired owners on fixed incomes facing steady increases in property value with tax payments they can't manage. For this purpose, Ohio and other states have established a Homestead exemption which limits the yearly increase in property tax so that owner-occupants are not "taxed out of their homes". Further, the State of Ohio reimburses school districts and local governments for the amount of revenue taxpayers save through the homestead exemption. Your local governments and schools do not lose out.

Note: You will not automatically receive a homestead exemption. You have to apply for it. See. "Why didn't I receive the Homestead Exemption?"

By law, in Ohio, a 10% penalty is assessed on unpaid property tax balances after each collection period and interest is charged on unpaid balances from previous years. At the end of each year, properties with past-due tax liens may be certified delinquent. The treasurer may then sell these delinquent liens for the amount of the taxes owed. The person who buys the lien will then try to collect from the owner of the property, and has the legal right to foreclose on the property if the money cannot be collected.

In Ohio see also:

• Columbiana County, Ohio - Auditor
• Mahoning County, Ohio - Auditor
• Trumbull County, Ohio - Auditor

How is a home's value determined?

See >> Real Estate Guide: Your Mortgage (Market Value) - Appraisals & Market Value

Where can I learn more about appealing my property taxes?

Contact your local tax assessor's office (County Auditor) to see what procedures to follow to appeal your property tax assessment. You may be able to appeal your assessment informally.  Most likely, however, you will have to go through a formal tax-appeal process, which begins with an appeal filed with the appropriate assessment appeals board.

During the appeal you will required to prove your case by producing comparable home sales that support your claim. This can be done via a certified appraiser or by using a knowledgeable REALTOR to bring you a Broker's Price Opinion. Under no circumstances go into the appeals hearing armed only with a value opinion that you have downloaded from some web AVM source.

See >> Real Estate Guide: Selling Your Home (Market value) - Can I find out the value of my home through the Internet?

Can the amount of my real estate tax change every year?

In Ohio, since 1976, voted levies have collected the same amount of money each year. In other words, mills decrease, when property taxes increase. The adjusted figure is called the effective tax rate. Revenue from voted levies grows only when new construction is added to a jurisdiction.

From time to time, as an owner, you may find that your tax bill is subject to a special assessment for such things as sidewalks, street lighting, or sewers. This assessment will be over and above the regular tax bill and will be assessed for a specified period of time.

Why didn't I receive the Homestead exemption?

In Ohio, your property tax, although billed by the county treasurer's office, is actually prepared and approved by the county auditor. You must apply to the county auditor in the county in which the property is situated in order to receive your Homestead Exemption . Your application must then be approved by the county auditor. The exemption is not automatically applied, nor will you be reimbursed for tax periods you missed by not filing a timely exemption application.

In Ohio, as of January 2008, this exemption is available to all property owners 65 years or older, and to totally and permanently disabled owner-occupants regardless of age or income. It can also apply to property held within a trust if  the trust qualifies. (Note that it does not apply to investors or those who own the property but live elsewhere.) In Ohio, it is not automatically applied, you must must apply with your local county auditor in order to take advantage of the homestead exemption.

When a Homestead property is sold or otherwise transferred the exemption is extinguished and the tax on the property will rise significantly. You should disclose the fact that you are Homestead Exempt to a buyer, should you decide to sell your property.

In Ohio see also:

• Ohio's Expanded Homestead Exemption and Homestead Exemption: Are You Eligible?
• Homestead Exemption Application for Senior Citizens, Disabled Persons and Surviving Spouses

How are real estate taxes used?

Nearly two-thirds of all property taxes collected in most Ohio Counties are for the benefit of Ohio's schools. Ohioans are very cognizant of the fact that good school systems bring with them higher property values and vice versa.

A smaller percentage is allocated to municipal or township governments, with about two percent going to locally-approves levies, such as police and fire districts and public transit. The remaining funds are shared by voter-approved levies for parks, libraries, children's services, mental health facilities and more.

Were property taxes ruled unconstitutional as a means of funding Ohio schools?

Although a superficial reading of the 1997 Ohio Supreme Court ruling may lead one to think so, this simply is not the case. The court did, indeed, rule that the dramatic disparity between the taxes collected and, therefore, the actual money allocated to some Ohio school districts is unconstitutional. A twenty mill annual property tax in one district may produce $10,000 per student, but only $1,000 in another because of the disproportionate property values in the two districts. The Court said that a constitutional funding system must be devised to overcome this inequality. Although the Court criticized the State's "over reliance" on property taxes for school funding, it did not say that the use of local property taxes in and of themselves were unconstitutional.

The 1997 ruling gave the Ohio General Assembly a year to overhaul the funding system and reduce the reliance on local property taxes. As of 2008, the General Assembly has done little to rectify the status quo, and the 'system' remains unconstitutional - a 'mandate' with no legal remedy. (Note: In 2003, the U.S. Supreme Court declined to hear the case. Some jurisprudence experts say that this effectively ended the argument against the use of property taxes for school funding.)

Are property taxes deductible?

Property taxes on all real estate, including those levied by state and local governments and school districts, are fully deductible against current income taxes.

Are taxes on second homes deductible?

Mortgage interest and property taxes are deductible on a second home if you itemize. Check with your accountant or tax adviser for specifics.

What is an impound account?

An impound account is a trust (escrow) account established by the lender to hold money to pay for real estate taxes, and mortgage and homeowners insurance premiums as they are received each month.

Do all loans require impound accounts?

If you are taking out a FHA or VA loan, the lender can require an impound account to pay real estate taxes and hazard insurance premiums, as with a standard loan. Most conventional loans in the past did not require an impound account, however since the mortgage 'melt-down' more and more lenders are making it a requirement for their own protection.