Property Taxes

In some states, when a property changes ownership the property appraiser removes any exemptions and reassesses the property so the assessed value equals the just (or market) value. Does that mean a buyer’s property tax amount will likely increase from what the seller was paying? Yes. Even when a seller’s property is not homesteaded, there could be a non-homestead cap (e.g., 10%) in place. Again, it depends on the state.

For example, in the state of Florida, USA, one way to ballpark what the reassessed property tax will be is take the just (or market) value from the current year’s TRIM (Truth in Millage) notice and multiply that amount by the millage rate divided by 1,000. The millage rate is a standard component of property tax calculation in the vast majority of U.S. states. A millage rate, also known as mill levy, is the tax rate applied to a property's assessed value. One mill is equal to one-thousandth of a dollar, or $1 in tax for every $1,000 of assessed property value.

If the just value is $400,000 and the millage rate is 14.2904, the calculation would be: $400,000 * (14.2904 / 1,000) or $400,000 * .0142904 = $5,716.16.

Note: Some real estate agents will tell home buyers to multiply the asking price by 2% to estimate new property taxes. A Millage rate of 14.2904 becomes .0142904 and a Millage Rate of 17.5059 becomes .0175059 after dividing the Millage rate by 1,000. So, the 2% or .02 is likely where that comes from and why that is suggested. However, tax assessors will often use either the market value or sales price depending on which is greater. So be careful. Know and understand which ingredients are being used, rather than an estimated ballpark using a fixed percentage (like 2%).

Although a property reassessment is triggered with a change in ownership, the change in property taxes usually doesn’t occur until the year following the effective date of the sale. So, although the closing date was, for example, sometime in 2022, the reassessed property taxes would become effective in 2023 and seen on the 2023 calendar year’s tax bill.

However, it is important to note that a seller may elect to transfer homestead exemption benefits from one home to another. Therefore, the property taxes due at closing could be based on a property reassessment that was triggered by a seller recently removing homestead exemption benefits.

True story: The seller of Property (A) has another home (Property B) that they will move to. Property (A) has homestead exemption benefits. Property (B) does not. In 2021 the seller requested a transfer of homestead from Property (A) to Property (B) which was approved with an effective date of 1/1/2022.

Property (A) was sold on 7/19/2022. The assessment value of Property (A) was $3,534,999 in 2021 and $8,723,102 in 2022 due to the transfer of homestead from Property (A) to Property (B). Had homestead remained with Property (A) through the 7/19/2022 closing, the assessment value would have increased a maximum of 3%.

Had the seller waited a year before transferring homestead benefits the buyer would have saved $40,034.66 and the seller would have saved a net $39,274.70 between Properties (A) and (B). That’s a total combined tax savings of $79,309.36. Attached are the numbers.

Interestingly, Property (B)’s assessment value would have only increased roughly 15% from 2021 to 2022 without homestead compared to Property (A)’s reassessment triggering a whopping 146% increase in assessment value. So why not endure a 15% increase on Property (B) and enjoy the huge tax savings and benefits of a 3% maximum increase on an already homesteaded Property (A)?

Notice that the calculation used was the 2022 Just or Market Value times the Millage rate divided by 1,000. This is important because the sales price may or may not be used to calculate the property tax reassessment. In this case sales price was not used. Only the market value.

Also, mortgage lenders use escrow to pay property taxes. If property taxes are incorrectly estimated, escrow may need revisiting, inevitably affecting home buyers.

Case and point: The selling price in the above example was $5,725,000, however, the 2022 Just (or Market) Value of $8,723,102 was used and the market (or just) value even went up in 2023 (to $9,737,289) although the selling price was substantially less.

Following is a screenshot from a property tax assessor website cautioning home buyers about property taxes.

This is good. Property tax assessors are letting home buyers know in advance that their property taxes will change. However, the formula or calculation used may ask for sales (or purchase) price.

Following are two screenshots showing how tax assessors sometimes require and include sales (or purchase) price as criteria.

Notice how the estimated taxes change substantially depending on the value entered in Step 2 (purchase or selling price).

In the example below, both the continuing homesteaded tax as well as the estimated reassessment tax are shown. A = the tax assessor’s market value, B = the Millage rate, C = the Non-Ad Valorem Assessment, and D = the calculated reassessment tax which is: (A * B / 1,000 + C). The reassessment tax is referred to as: “Estimated Tax Amount without SOH”.

SOH is the abbreviation for “Save Our Homes”. The SOH benefit is simply the difference between the tax assessor’s market value (i.e., Just Value) and the tax assessed (i.e., Taxable) value. See "HX Savings" below:

What’s interesting is that most states have a cap on how much of the SOH is portable. Meaning, although $2,339,691 (i.e., $4,323,870 - $1,984,179) may be reflected, only a maximum of $500,000 can be used in the state of Florida. Even less if the individual or applicant is downsizing.

For example, if an individual is downsizing from a $6M home to a $1M home and there is a SOH of $2M on the $6M home, only $333,333 would be transferable as a SOH benefit. The calculation is as follows:

$1M (New home value) / $6M (Original home value) = 16.67%. The SOH of $2M is then multiplied by 16.67% which equals $333,333.

So, what happens to the remaining $1,666,667? Nothing actually. The $2M reflects accumulative tax savings over the years. When homestead is abandoned (or transferred) for a particular property, so are the SOH benefits with the exception of the portion or amount that’s eligible for portability.

In the state of Alabama, the property tax calculation is relatively simple, compared to the state of Florida. In Alabama, the market value is multiplied by a state-mandated assessment rate to determine the property's "assessed value". The assessment rate depends on the property's use. Alabama's primary property classifications and their assessment rates are; Class I (Utility) = 30%, Class II (Residential, Private, and Farm) = 10%, and Class III (All other property) = 20%. The assessment value is then multiplied by the millage rate divided by 1,000. So a residential property with a market value of $4,077,900 would have an assessment value of $407,800 and the annual property tax would be $407,800 * (39.00 / 1,000) = $15,904.20.

Wow, that little footnote means “a lot” (or two)

True story: A home was purchased on 9/8/2020 for $4,259,750 in the state of Florida. The Just (or Market) value in 2021 was $3,737,100, so the Assessed value became $3,737,100 for tax year 2021. A homestead application was filed and approved in 2021 as well. In 2022, the property taxes were capped at 3% but the Just value increased roughly 76% that year. Why? Well, next to the line item for the 2022 tax year there’s an asterisk (*) followed by a footnote reading: “Indicates the parcel was the subject of a split or combine for tax year.” So, what does that mean?

Evidently, there were two parcels that became one in the year 2022. The main home on one lot and a detached garage with three bays on an adjacent lot. The two lots combine for a total just under one acre.

In 2023 the Just value increased 9% from 2022 and increased another 22% in 2024. The Just value in 2024 was $8,881,400, the Assessed value (before any homestead exemptions are applied) was $4,103,575 since there is a 3% cap in place, and the SOH bucket was $4,777,825 in 2024.

The home has (or at least had) an active listing for sale. The Ad-Valorem taxes for 2024 were $59,426.67. The millage rate was 14.6225. Dividing the millage rate by 1,000 and then multiplying that result by the Just value will offer a prospective buyer a very ugly glimpse at what the reassessed property taxes will look like the year following the year of the sale. The estimated reassessed property taxes would therefore be roughly $129,868.27. So, that little footnote actually does mean “a lot… that were two...lots”.

Here’s an idea: Allowing home buyers to take a ‘grandfathering provision test’ for purposes of determining if the 3% tax assessment cap would continue or not. Following is a sample test.

Homestead Grandfathering Provision Test (H-GPT) - Sample

What happens when a property is homesteaded?
If approved, when does homestead benefits take place?
What is a CPI and how is it involved in homesteading?
What is a Millage rate?
What is a TRIM notice?
What is a Just or Market value?
What are Save Our Homes benefits?
What is a 10% Non-Homestead Cap?
How much of the tax savings through homestead are portable?
How is the tax reassessment calculated when a property changes ownership?

Would such a provision or test ever see the light of day? Probably not. Reason being, the objective of the tax assessor is to assess and assist in levying as much taxable property as possible. Changes in ownership give tax authorities the convenient opportunity to swoop in and “reset” or reposition the bar. Doing so at the expense of the home buyer, unfortunately. Even sellers of property may not fully realize that only a portion along with a maximum cap is portable, as outlined earlier.

And just as some home owners are electing to stay in their homes because of rising interest rates, some may decide to stay in their homes due to rising Just (or market) values, given the prospective tax reassessment.