If you’re looking for a home out on the water, check out these insights below to better understand your future property taxes before making the plunge.
Whether you are looking for a stunning new primary residence, buying a luxurious vacation home, or diversifying your real estate investments, there are numerous benefits of owning a lake house. The Austin, Texas, area boasts an array of fabulous lake home properties with phenomenal vistas within East Austin real estate or Lakeway, TX waterfront homes for sale.
Of course, lake houses tend to come with higher price points and additional hidden costs. First-time homebuyers, in particular, may be concerned about property taxes when buying their gorgeous lake home. Read on for some insights to help clear things up.
Lake houses and taxes
Waterfront houses are highly desirable, thanks to their marvelously scenic views and recreational opportunities out on the waves. This makes them excellent real estate choices if you plan to open them as popular rental units or invest in them for future appreciation. Classifying your home upfront for mortgage purposes and tax season is important.
- If you intend to live in the house most of the year, it is your primary residence.
- Any home that is not used as your primary residence (such as your vacation home) is a secondary residence.
- If you intend to rent the lake house out, it may be classified as an investment property.
Keep in mind that lakeside properties are often subject to higher property taxes regardless of their usage classification. Therefore, it is essential to understand local tax laws before buying your home.
What are property taxes?
Property taxes are levied on property owners by local governments to provide revenue for various services. These tax-funded services typically include schools, police, full-time fire department, garbage collection, and public parks. The nicer the facilities and services, the higher the taxes are likely to be.
How are property taxes calculated?
Property taxes are greatly affected by the neighborhood in which you live. The tax is determined by the property's assessed value and the area's tax rate (also called a mill levy).
Fair market value
A home's fair market value is based on the amount a house would be expected to sell on the current market between an unrelated but knowledgeable seller and buyer. You can use a home value estimator to find out more.
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When calculating property taxes, municipalities will assign a home a dollar amount based on its assessed value. It may be assessed annually or when a property is purchased or renovated. Features that impact the assessed value of a home may include:
- square footage of the home
- number of bedrooms and bathrooms
- amount of acreage
- purchase price
- comparable nearby properties
Typically, a property's assessed value falls somewhere between 80% to 90%
of its fair market value. The home’s assessed value, minus exemptions or other adjustments, is the taxable value.
You can usually find current annual property tax information on a real estate listing online. However, you can also look for the information on the local tax assessor or municipality's website or call their office for more details.
Some homeowners are eligible for property tax exemptions, which can lower your property taxes or even eliminate them. While you should check with your local government to determine if you qualify, here are a few common exemptions:
- Homestead exemption - for homeowners who live on the property full-time; vacation and investment homes do not qualify.
- Senior citizen exemption - residents of a certain age who live on their property full-time may qualify for a discount, rate-freeze, or other special exemption.
- Homeowners with disabilities - homeowners who have disabilities may be eligible for reductions or elimination of taxes
- Exemptions for veterans - active service members or veterans may receive certain savings and tax waivers.
Potential buyers should be aware that, when buying a home with existing exemptions, the current property tax numbers may not accurately reflect future property taxes.
The mill levy is the tax assessment rate for local real estate. This number varies significantly based on the area, public amenities, and the local government's required revenue. The tax assessor's office or website will list the property tax levy, typically as a percentage.
You can estimate a property's taxes by multiplying the levy by the home's assessed value.
When do you pay property taxes?
When a real estate transaction occurs, the buyer and seller will often split the cost of property taxes, which are prorated based on the time each party owned the property. However, buyers and sellers can negotiate who pays specific fees, including property taxes.
Sometimes, escrow accounts are established to pay property taxes when a house is financed. An escrow account is set up with the mortgage provider. They will estimate property taxes for the next year and split them over 12 payments, added to your monthly mortgage payment. The lender then disburses the money placed into the escrow account to pay the property taxes when they are due. Some lenders require escrow accounts to prevent borrowers from defaulting on property taxes. An escrow waiver is possible, and approval may depend on your loan-to-value ratio and other factors, but lenders are not required to approve the request.
Challenging property taxes
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It is possible to challenge the property tax calculation if you believe the assessment is too high. You can appeal the assessed value of the home or a rejected exemption. The appeals procedure will depend on the municipality, but you will need to carefully prepare documentation that supports your claim of incorrect property value assessment, which may include:
- Sales price documentation
- Blueprints, receipts, or estimates for updates or repairs
- Deed records
- A statement from an independent appraiser
- Proof that attributes (square footage, lot size, etc.) which were used to determine the appraisal value were incorrect
- Local comparable property assessments
You must ensure that you file your appeal correctly by the required dates.
Deducting property taxes
It is possible to deduct your property taxes from your federal income taxes, even if the home is a vacation home. Depending on your filing status, you can deduct up to $10,000, but that includes property taxes, state income, or sales tax deductions.
Neglecting property taxes
If you do not pay your property taxes, you will likely incur penalties and risk mortgage liens or foreclosure. Municipalities can place a lien on your property and have the first claim to any proceeds when you sell the property until you have settled the lien. Mortgage liens can also result in foreclosure if you accrue significant past-due taxes.
Other hidden costs for lake homes
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In addition to property taxes, there are a variety of other "hidden" costs associated with lake homes.
- Leased lots - depending on who owns the lake and the shoreline, you may enter into a long-term lease with the land owner. When considering a lake property purchase, always find out who owns the shoreline and if the home is on a leased lot.
- Homeowner's insurance - lake homes tend to command higher insurance, which often includes additional flood insurance due to increased exposure to natural elements. Also, your regular homeowner's insurance may not cover structures like docks and sea walls. Additional insurance may be required.
- Boat Docks - whether you are building a new dock or replacing an existing one, a high-quality structure is a small investment.
Carefully consider and evaluate all potential costs associated with buying and maintaining a lake house so you can make an informed financial decision regarding your purchase.
Work with the professionals
Buying a lake house takes an impressive amount of bravery and determination, so it also takes an exceptional real estate agent, attorney, and tax professional to get the job done. Knowledgeable professionals can guide you through the local laws and estimate your potential property taxes. An experienced real estate agent in the Austin, Texas, area will be a valuable asset every step of the way.
When you are ready to explore all that lakefront real estate has to offer, contact the Boutros Group today for phenomenal customer service. With compassion, endless skill, and exceptional market knowledge, the Boutros Group is ready to help you find East Austin homes for sale, Lakeway real estate, or other elegant properties in these beautiful Austin communities.