Understanding Property Taxes in your Real Estate Market

Property tax increases are a popular method used by municipal and county governments to raise revenue, but they can also have a big impact on the local real estate market. For example, a slight tax increase may drive demand for local homes down, a shift many might characterize as "negative." But a clear understanding of local market conditions can help real estate professionals, buyers, and sellers take advantage of any new tax scenario and get the most for their property investment.

In most cases property taxes are levied as a percentage of a home's value, or an acceptable representation of the home's value. Governments generally assess homes at 100 per cent or less of their estimated market value in an attempt to keep taxes affordable. By this method, local real estate trends are kept at arm's length, and property owners don't have to worry as much if a neighboring home sells for $10 million. Property taxes often generate the majority of a city or county's annual operating budget for hospitals, school systems, waterworks, parks, libraries, police, and other expenses.

Cities and counties can use a variety of taxation strategies beyond an outright increase to control revenue, stem urban sprawl, or change the local real estate market. One of the more common strategies for this is land value taxation, which separates the value of a property from its improvement value, applying a gradually lower tax rate as more improvements are made to a property. Using this tax rule, developers can make significant improvements to a property, like building an apartment complex, while still being able to afford the taxes. This method is commonly used to make high density housing more economically feasible in downtown areas. Current-use valuation is another familiar property tax control, whereby properties are valued only according to their current use, and not potential uses - this is often used to protect large undeveloped areas like farms from urban sprawl.

Some property taxes are also limited to a certain cross section of homes, or homes above a certain market value, in order to protect affordable real estate. One example of this was seen in summer 2007 in Ulster County, New York, where a proposed real estate transfer tax was only meant to apply to homes above the median sale value for the area. Values here were destined to shift as buyers searched out properties below the median price range.

Every property tax change is a new marketing opportunity for real estate professionals and their clients. The trick is knowing what to expect from different tax strategies, and how long those effects will last.