Hitting home

Charles Reyes Jr. scribed an excellent piece on property taxes earlier this week. The piece sent me reaching for my financial calculator so I could crunch some numbers.

Property taxes, a grim fact of life in the United States, are, at least as far as real estate goes, a tax angle lacking from the local scene. Mr. Reyes’ piece illustrates the case of a stateside couple that bought a home for $180,000. A few years down the road Big Bro assessed a value of $288,300 to it, clipped to a bill for $7,554 in taxes.

The bill comes to 2.6 percent of the assessed value of the home. Another way to look at it would be to calculate how big the tax bill is compared to the mortgage payments on the house.

Taking today’s mortgage rates of about 6.8 percent, if a $180,000 home is purchased on a 30 year mortgage, the monthly payment comes to $1,173, which adds up to $14,082 per year. The tax assessment of $7,554, then, is more than half (54 percent, to be exact) of the yearly home payment! That’s like having to buy half a home for the government when you buy one for yourself.

Sounds like a pretty raw deal to me. The homeowners sure thought so, and went to court, resulting is a reduction in the tax bill to $5,808. That’s still one heck of a bite, fully 41 percent of the yearly mortgage burden.

If we consider a case where the home didn’t increase in assessed value, we can apply this 2.6 percent rate to the $180,000 purchase price, yielding $4,680 in tax, which comes to 33 percent of the yearly mortgage price. Meaning, when you buy yourself a house, you have to buy one-third of a home for the government.

Turning back to the scenario in which the assessed value goes up: It can be pointed out that the increased value means that the homeowners became wealthier, that is, the $180K they paid gave them a home valued at $288K. That’s a pretty sweet capital gain.

But it’s a gain that goes unrealized until the home is sold. What if this couple intended to keep the house forever? They could easily find themselves being priced out of their own home by the increase in value and the consequent increase in taxes. Can you imagine being retired, and being forced out of the home you worked for your entire life because of the property tax? That’s a downright depressing proposition.

I always regarded home and hearth as sacred territory, for we all want some quiet corner of the earth to call our own, some safe haven where we can hide out from the chaos and treachery of daily life. People will never agree on how high taxes should be, who should pay them, and what the taxes should be based on (income? wealth? consumption? import duties? profits? property?). One thing is for sure, though: property taxes sure hit home in the purest sense.