Death and Taxes are said to be the two absolutes in this life that we can consistently count on. While this adage paints taxes in a less than attractive light, a deeper understanding of what taxes are and what they accomplish is helpful in swallowing our medicine when we pay those bills.
Specifically, let’s talk about property taxes: after all, we are REALTORS® and not IRS agents. (You’ll have to find a friendly IRS agent to write a blog about the ins and out of the federal income tax, and that would most likely be the length of a novel rather than a pithy blog post.) As real estate agents, we help our clients understand what to expect to pay in property taxes for their properties when they purchase them, how that will affect their finances, and how to negotiate the payment of taxes in the purchase agreement.
(Photo by Scott Graham on Unsplash)
There are lots of different types of taxes, and sometimes it feels like we are paying taxes more than we are doing anything else. There are several main taxes that everyone encounters:
Federal and State income taxes: The Federal income tax is a progressive tax, meaning that as your tax bracket changes, the rate at which you are taxed changes. The dollars generated by our Federal income tax in the United States pays for many different expenses in the federal budget: national defense; health care ( including research, food safety, disease control, and public health services); income security ( including retirement for federal employees, food and nutritional assistance); interest on our national debt; Veterans benefits; education and job training beyond high school; federal law enforcement and immigration ( including the federal court system), natural resources, energy, and environment; international affairs (humanitarian aid and embassy/diplomatic maintenance); Science, space and technology.
In Indiana, our state income tax is a flat rate of 3.23% , meaning that everyone pays the same percent of their income regardless of income.
Sales tax is the largest source of revenue for the Hoosier state. In addition to the Indiana state sales tax of 7%, there are local sales taxes, gasoline taxes, and cigarette taxes.
Payroll taxes are taken from your paycheck by your employer who then pays into the Social Security and Medicare buckets, so that when you retire and have less disposable income, you have a safety net for living and medical expenses. Even self-employed people have to account for these taxes when they are setting up their finances
So if we are already paying all of those other taxes, what is the point of property taxes?
Money from each pot of taxes pays for different things in the federal, state, and local budgets, and each level of government is responsible for different parts of the budget. Property taxes in Indiana pay for the following: local public school systems, libraries, parks, law enforcement, fire departments, emergency services, and more. Can you imagine what our community would look like if property taxes didn’t fund these local institutions?
According to the DLGF (Department of Local Government Finance) The statewide average revenue distribution for each property tax dollar is as follows:
- County: $0.19
- Township: $0.03
- City/Town: $0.24
- School: $0.42
- Library: $0.04
- Special Unit: $0.07
Property tax is a type of ad valorem tax, meaning that it is calculated based on the value of your property, so everyone’s property tax is different because everyone’s property has a different value; but the rate at which they are taxed is consistent within the area you live. Gross assessed value can often be subject to additional deductions that greatly lower your tax bill. For example, one of the most common deductions in Indiana is the Homestead Deduction. Your total tax is calculated by the assessor and then payments are due in two installments the following calendar year.
If you have a mortgage, your property taxes are part of your mortgage payments. The bank pro-rates your property tax bill and calculates the monthly breakdown in taxes. Every month, the property tax portion of your mortgage payments gets put into an escrow account and the loaning agency then pays your tax bill for you every 6 months when it comes due. You probably receive a statement from your city or county government every year so you can keep an eye on what is happening, because your mortgage payment may have to be adjusted here and there if the assessment or the taxes would happen to change.
In Indiana, property taxes are paid in arrears, meaning that you pay in the current year for the previous year’s assessment. Property taxes for the previous calendar year are due on May 10 and November 10. To clarify, the installment of property taxes that people are getting ready to pay on November 10, 2020, is ½ of the total tax bill from 2019.
Real estate practice in different areas of the state varies in how the taxes are negotiated into the purchase agreement. Here in the Southern Indiana area, when we write purchase agreements, we usually do not prorate taxes (option 2 in section R of our purchase agreement), but rather, opt for the first option: “Buyer will assume and pay all taxes on the Property beginning with the taxes due and payable on ____(this is where May or November and the year are entered)________, and all taxes due thereafter. At or before closing, Seller shall pay all taxes for the Property payable before that date.” This is a clean, easy to understand way of writing a contract that prevents a lot of calculation mistakes.
To illustrate further, when purchase agreements are written, the seller picks up the most immediate next installment and the buyer picks up the one that is due 6 month after that. So, if we wrote a purchase agreement on October 1, 2020 (that would theoretically close on or around November 1, 2020), we would write into the contract that the seller would pay the taxes due November 2020, and the buyer would then be responsible for every installment after that, starting May, 2021.
Even when you don’t have a mortgage, you still have to calculate property taxes into your yearly finances, but instead of them being paid for you by a lending institution, you have to pay the bill directly out of your pocket, so don’t forget!
While property taxes might affect what kind of property you can afford, paying these taxes is an important part of keeping our communities safe and help contribute to your quality of life.
If you have any further questions about how property taxes might affect your next home sale or purchase, Let’s Talk! Our REALTORS® are always eager and available to help you navigate the details of your real estate questions.
