Understanding Property Tax Increases

Many home buyers have been facing a very challenging market over the past few years. The current supply of homes on the market just can’t keep up with the huge demand out there. It’s not uncommon for a home to come on the market and be sold in a matter of days after receiving multiple offers. With this fierce competition, prices have increased substantially over the last few years and has made it challenging for home buyers to find a home within the budget/payment they had planned for.  Many go over budget to get the home they want only to have another blow to that budget the following year due to the property tax increase.  This increase on the property tax portion of the mortgage payment can really hurt home owners enough to create a financial strain.

If you have purchased a home in Michigan recently, it’s a very real possibility your property taxes are going to increase for the next tax bill.  Are you prepared?

If home buyers understand what to expect the year following the purchase of their home, then they can budget accordingly. I want to help provide a better understanding to explain why this happens, show you what to look for if you are house shopping now, and how to calculate the potential higher property tax amount.

Definitions

First, you have to understand some basic property tax definitions to understand what you are looking at when you access the info.

• True Cash Value – The fair market value or selling price of property
• SEV – Half of the properties true cash value
• Taxable Value – This is the value used to actually calculate your property taxes.  By law, the state can only increase taxes each year by the rate of inflation or 5%, whichever is less.  Unless there are physical improvements to the property or ownership is transferred during the previous tax year.   The taxable value will never be greater than the SEV.

Obtaining Property Tax Info

Second, let’s talk about where to get accurate property tax info in Michigan.   There are a number of different ways to try and find the information.  Some counties provide the information on their websites.  You can of course do it the old fashion way and call the local assessor.  When it comes to looking things up online I would start here at bsaonline.com.   Most properties in Michigan can be found there although some areas do charge two bucks for the info.

The Math

Now that we have all that out of the way lets looks at the math.  The formula used to calculate property tax looks like this:

Taxable value  x  Millage Rate = Tax Levy  

So here is a simple example.  Lets assume the millage rate is 49 mills ($49 of tax for every $1,000 of TV) and the taxable value is 75,000.    To calculate annual taxes:  75 x 49 = $3,675 per year

Real Life Example

This is where the rubber meets the road.  I’m going to randomly pick a home that is listed for sale at the time of this post being written to show you what could potentially happen to the new buyers property taxes and mortgage payment next year.  After a quick search of the MLS I found a home listed for sale on Cambridge Dr in the City of Kalamazoo.  The seller is asking $209,000 for the home so we are going to assume that is the price the home ends up selling for.  I jumped on to bsaonline.com searched for the City of Kalamazoo and then searched for the property.  This is what came up:

The key variables you want to look for are:

Current Taxable Value: $63,247 (house is currently being taxed as if it were worth $126,494)

Winter Millage Rate:  39.7869 – 17.6757 (subtracting that on the assumption that the new owner will homestead the property and be exempt from the School Operating portion of the taxes) = 22.1112 mills

Summer Millage Rate: 28.3179

Total Millage Rate:  22.1112 + 28.3179 = 50.4299

Current taxes: $1,412.41 + $1,808.91 = $3,221.32

Remember the year following a property being sold, the city assessor will uncap the Taxable Value and adjust it to match the State Equalized Value.  When they see this home sold for $209,000 they will likely adjust the True Cash Value to match the $209,000 sales price.  Which will put the SEV & TV at half the TCV or in this case $104,500.

If that happens, here is what will happen to the taxes.  Remember Taxable value  x  Millage Rate = Tax Levy  

104.5  x  50.4299 = $5,269.92

That’s a total increase in taxes of $2,048.60.  The new buyer of this home is likely to see their mortgage payment increase $170.72 per month!  That can be a major blow to someone’s budget if they don’t know its coming.  This is really happening out there and it’s happening on most homes being sold right now in Michigan.

The Good News!

Thankfully, due to the laws currently in place in Michigan, this will only happen when the taxable value uncaps, which is only upon the sale of a home or when physical improvements to a property are made.  That first year there could be a big jump but for years to come after property tax increases should be minimal.  Additionally, we try and warn every home buyer we work with about possible increases. We do the math for you at time of application to give you a heads up on all this.    Also, if you need a little more help with understanding the calculations, I have a simple calculator available  that will figure the annual taxes by plugging in the SEV (use half the sales price), select the taxing authority, and school district. If you ever have any property tax questions I’m more than happy to help, just reach out.

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