As the old saying goes, nothing in the world is certain but death and taxes. Homeowners already know this to be true; in most parts of the country, property tax runs at least a few thousand a year. But what level of taxes should you anticipate as you plan to build a new house?
Of course, your individual tax bill will vary depending on where you build, the size of your home and lot, and other factors. However, several key considerations will help you determine about how much you should expect to pay in taxes for your new home.
Residential Property Tax Basics
Your home’s annual taxes will be based on several factors:
- Its most recent assessed value (for a newly purchased existing home, this would be the sales price)
- The applicable property tax rate, which is set by the local taxing authority
- The value of comparable homes in the area
- For existing homes, any improvements that enlarged or added value to the home
- Any exemptions for which you or your home qualifies (see below for more)
Your local tax assessor can provide you with more information on your area’s tax rate.
Lower Taxes for New-Construction Homes
In general, taxes on a newly built home are much lower during the first few years than those on a similarly priced resale home. As Zillow explains, that’s because a home’s property tax for any given year is based on its value in January of the previous year. For newly constructed homes, that value will often be based on an empty lot.
For example, if your new home is completed in October 2017, the value for 2017 and 2018 will be determined by the empty lot. This lag can save you thousands of dollars in the first few years of owning a new home.
Potential Tax “Traps”
If you plan on building a home in a new area, such as out in the countryside, be sure to do your research on the local property tax code. You want to make sure your new home won’t be subject to any unanticipated rate hikes or reassessments once you’re settled in.
You should also find out if your home falls under multiple property tax authorities, such as both the city and the county and any special districts, such as local water or school districts, all of which may impact your tax bill. Again, a quick trip to the local tax assessor’s office will help answer any questions.
Take Advantage of Deductions
A new home can also be a significant tax deduction, depending on your state’s individual tax laws. In many cases, you can deduct some or all of the following items:
- Your property taxes
- Mortgage interest on your primary residence (plus any secondary residence you own)
- Interest on up to $100,000 borrowed through a home equity loan or line of credit
- Money spent on home improvements that are required for medical care
Taking advantage of these important deductions can help you lower your overall tax bill, which can save you money for years to come.
While paying property taxes isn’t exactly a joy, always remind yourself that these funds play an important role in your local government. In fact, throughout the U.S., property taxes account for more than two-thirds of local governments’ revenues, helping pay for public services like schools, libraries, parks, and fire and police departments. All of these help make your city or town a safe and happy place to live—and may help ease the pain of property taxes just a bit.
Interested in learning more about building a new home? Read our Path to Home Ownership guide.
