Property Taxes Finally Start To Reflect Housing's Plunge

Many homeowners have been paying property taxes based on the values of their homes during housing's go-go days, but a recent slowdown in property tax increases suggests that, perhaps to the relief of some beleaguered borrowers, that may be changing.

USA Today reports that in 2011 property tax revenues fell below the inflation rate for the first time since 1995: Collections rose just 1.2 percent which, when adjusted for inflation, amounted to a 0.9 percent decline, says the Bureau of Economic Analysis.

The increase in property taxes over the course of the housing slump has been puzzling, National Taxpayers Union spokesperson Pete Sepp told AOL Real Estate last fall. "It defies imagination that in such a lousy housing market property taxes continue to rise."

But the impetus behind property taxes' rise during the recession appears to be twofold: one, local governments have turned to the revenue source as a way to bridge budget shortfalls caused by state budget cuts; and two, communities tend to base their property taxes on outdated assessments of home values.

A whopping 30 to 60 percent of property, including commercial property, is over-assessed for property taxes, the National Taxpayers Union said.

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Realtor magazine says that in some communities property taxes may reflect 10-year-old home values. But "generally, they say it takes two or three years for the effects of a decline to show up in property taxes," Brookings Institute fellow Tracy Gordon told AOL Real Estate.

As communities continue to update their property assessments, many are hiking rates to compensate, she said. "When home prices go up, policymakers might reduce property taxes," Gordon said, "but when property values decline, they might ... raise that assessment ratio" in order to sustain spending on public schools, maintenance and local services. (See a spending breakdown of property taxes for fiscal year of 2009 below.)

A homeowner may challenge a property tax assessment by proving that the value of the home, as well as the value of the home's entire neighborhood, has taken a significant hit. Up to 40 percent of homeowners who attempt to win a cut to their property taxes succeed in gaining a reduction.

But the cost-cutting tactic is highly underutilized, information from the National Taxpayers Union seems to suggest, with only 2 to 3 percent of homeowners ever attempting to have their property taxes lowered, according to the organization.

As more homeowners realize that they are paying property taxes based on inflated values, however, that may change, said Gordon, who is an economic studies fellow at Brookings. And that could present a serious problem for communities that are still struggling to provide basic services in the face of state budget cuts.

"A concern that local governments have is that more people will be coming forward for a reduction in their assessed [property] value," she said.

For more information on steps you can take to lay the groundwork for fighting a property tax after buying a home, see "Don't Let High Property Taxes Stall Your Home Purchase."

For additional information on reducing your property taxes, see "How to Lower Your Property Taxes."

Follow Teke Wiggin on Twitter (@tkwiggin), follow @AOLRealEstate, or connect with AOL Real Estate on Facebook.

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