Archive for February, 2011

Tax Bill on new purchases

February 7, 2011

This little tip is so basic as to seem not worth mentioning; everyone must know this – right? Guess again.

It is amazing to me, even after 44 years in the real estate business, how many real estate practitioners analyze their investment income-producing listings based on the current property tax. In consultation with the seller they set the asking price based on a certain net operating income; that is, after all expenses are paid, including utilities, maintenance, real property taxes, personal property taxes if any; snow removal, insurance and some other items that may be unique to the property.

What is most often left out is management, which should be included even if the owner does it themselves, and replacement reserve; meaning if the hot water tank or roof has about two years left that should be considered in the sale price and after closing replacement money should be set aside each year based on the life span of that item.

Yes, in real life some of that is tough to negotiate and you may have to compromise if you think the property is worth paying more than the pro-forma.

However, never accept the analysis, i.e. the estimated return on investment, if the real property taxes are based on the current Taxable Value, rather than what the new State Equalized Value might be.

In the State of Michigan increases in the Taxable Value are held to 5% or the rate of inflation, whichever is less. When a property is sold, the tax base then reverts to State Equalized Value and annual Taxable Values are then capped once again. That law, or one similar, may be true in your state, too. After you close the sale you may be looking at a much higher real property tax bill.

Keep that in mind when you are doing your due diligence prior to signing an offer to purchase.