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Caveat Emptor: Property Tax Exemptions & Demographic Risk in the Housing Market

In Le Gardien on August 7, 2015 at 1:50 AM

If you are buying a house this year, then beware of property tax exemptions and demographic risk in the housing market, i.e., specifically, understated property tax estimates reflected in your projected monthly mortgage payment. When the seller of the property is a senior receiving a 100 percent property tax exemption, then your first “real” monthly mortgage payment can very easily be largely understated, and in some cases significantly so based on the property value. Errors in the underwriting process and realtor advertising can make for significant “payment shock” and imperiled repayment prospects just as you are handed the keys to your new castle. Monthly debt services include principal, interest, taxes and insurance (in typical instances).

For example, Cobb County, Georgia has a 100 percent property tax in place for seniors 62 years of age and up. According to Tax Commissioner Carla Jackson’s website, the exemption applies to “all taxes in the school general and school bond tax categories.” Properties in the county are assessed at 40 percent of the property value and then various millage rates are applied in order to calculate the tax owed for a given property in order to fund the public school system.

An example of savings for a few Georgia addresses are provided in the Appendix below. From one year to the next, based on whether or not the owner qualified for the generous exemption, you can see that the savings can be quite large. Across the six counties reference in my example, the 22 properties amount to average savings of $2,836.89 per year per property.

Beyond Cobb County, other counties in Georgia and in the rest of country offer similar aid to retiring baby-boomers and elderly individuals. For a sense of how tax jurisdictions might differ in policy, some offer qualifying thresholds that may be lower in percentage terms, limited in dollar terms and/or assessed against income levels as well. According to one AJC article, Cobb County began offering the senior tax emption in 1973 alongside a $6,000 income limit, but the limit was removed 6 years later.

According to one theory, relief in the form of senior property tax exemptions could make more sense if applied in relatively richer areas where the per student spending levels already outperform the average per student spending levels. A more justly administered policy, however, might stipulate that the exemptions apply solely to lower income seniors, with the remaining surplus of funds instead re-allocated to relatively poorer areas in order to achieve parity in per student spending levels. According to Georgia State University’s Center for State and Local Finance, “Georgia is near the bottom in state per pupil funding” at No. 40 and the spending gap per student is $79 more in districts with the highest property tax wealth compared to districts with the lowest property tax wealth. Interestingly, Vermont somewhat recently moved to eliminate such education spending disparity. Economists like the late James Tobin and Thomas Piketty, more recently, have also commented on this subject as being part of the prescription for improving income inequality.

“In my Father’s house are many mansions”

Lenders and realtors alike need be more mindful of underwriting and selling to the teaser rate on property taxes moving forward for ethical and reputational purposes. A once Lysian sales pitch might be polished and profitable in the moment, but it may prove to be just as siren-like if repeated too many times, that is, once it achieves “too good to be true” status. As the number of baby-boomers selling houses continues to become more concentrated as a fraction of the whole over time, any refrain from implementation of timely advertising controls will prove ultimately perilous for not only the buyers, but also the sellers.

Appendix:

ptax

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