When people purchase a home, especially for the first time, many practice their due diligence and find out the amount of the present tax bill and proposed insurance in order to calculate their closing costs and future expenses in addition to their proposed mortgage payment.
This is not as easy when purchasing a newly renovated or built home. Yes, you can estimate taxes based on the purchase price of the property, but people are often blindsided by a supplemental tax bill. Not all jurisdictions have supplemental tax bills, so it is wise to check the jurisdiction in which you are buying to be certain.
What is a supplemental tax bill?
A supplemental tax bill is a bill that is issued when a property is reassessed during the current tax year. Often the supplemental bill will be for a specific period, i.e., a quarter, half or three-quarter tax period. This bill is an additional bill that is sent directly to the home owner and is paid directly by the owner.
Tax escrows that are collected by the mortgage companies as part of the servicing of a loan do not contemplate supplemental tax bills. In fact, most mortgage companies will have you sign a document at closing stating the borrower/home owner will be responsible for paying any supplemental tax bill directly.
What “triggers” a reassessment of a property?
Typically, major renovations or improvements added to a property will trigger a reassessment at time of completion.
What constitutes completion?
Usually, completion is when all permits are closed, certificate of occupancy is issued, and/or the property is sold as an improved lot.
Why would this affect a new home buyer?
At time of purchase of a new home, the real property taxes are often based only on the assessed value of the lot. The sale itself triggers a reassessment. Although this can be contemplated for purposes of an escrow account by estimating the taxes based on the purchase price, there is no way to know what the new actual assessment will be and when it will be actually done.
It is prudent for a new home buyer to put money aside based on the timing of closing and the estimated amount of taxes based on the purchase price. In Maryland, the fiscal year runs from July 1 through June 30 of the following year. So for example, if you purchase in September you should expect to get at least a three-quarter supplemental bill.
Whether you are a first-time homebuyer, first-time new homebuyer or just someone who likes to do the homework – remember to consider supplemental tax bills when looking at not only the closing costs but future carrying expenses for your new home.
For further information, feel free to contact Catherine Schmitt at Federal Title & Escrow Company.