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Understanding Special Taxes

26 Jun 2015

When buying a new home, consumers are often confronted with an added monthly expense of special assessments that are connected to the title of their home. In most major cities where there is a lot of new development, special assessments are quite common, and in fact, are quite popular. Understanding how special assessments are either an advantage or disadvantage for you is the topic of this article.

First of all, let us determine where special assessments originate and what their function is. Municipal and county governments will often cooperate with builders and developers to create benefit districts within their jurisdiction for the development of infrastructure such as streets, sewers, storm sewers and water service lines. These benefit districts create a way for builders and developers to provide, at a lower initial price, building sites for both residential and commercial properties. This development provides local governments a larger tax base to fund their operations which proves to be a beneficial for everyone involved. Once the cost of the infrastructure improvements in the benefit district is established, local bonds are sold to finance those improvements. The total cost of construction and financing are then divided between the number of parcels (lots) created by the benefit district. That divided cost is recouped by the local government in the form of “special Assessment Taxes” levied by that government body by deed restriction to that parcel.

Now the big question, is this a good thing for the home buyer? The answer can be either yes or no depending on your situation but let’s first establish some parameters. First parameter: typically the infrastructure for a building site is about equal or slightly higher than the land cost, so that a $25K piece of land with added infrastructure costs would be $50K plus. If the interest rate on the municipal bonds is cheaper than the current mortgage rate then you benefit because your financing costs are less. The opposite is true if the bonds are higher than the current mortgage rates. The second parameter is that special assessments are structured over an extended period of time, often 20 years. Therefore, if you are only planning to stay in the home for a short period of time, special assessments benefit you because you only pay for the infrastructure for the time you use it. If you are planning to live in your home for a long period of time, that advantage is lessened.

Take the time to ask your realtor about special assessment taxes in your area. If you are looking to buy a newer home, the discussion will be pertinent. Take some time to learn if living in an area with special assessments is a benefit for you.

Terry Robinson is a Realtor/Owner of Foundation Realty in Manhattan Kansas and has been a builder developer for over 30 years.

Written by: Terry Robinson

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