The City of Harrisonburg is considering increasing the real estate tax rate from $0.59 per $100 of assessed value to $0.63 per $100 of assessed value.  Rockingham County is also considering a $0.04 increase, from its current tax rate of $0.60 per $100 of assessed value to $0.64 per $100 of assessed value.

To understand the potential rationale behind such an increase, let's examine funding levels given a few assumptions to make the math a bit easier.  First, we will assume that all tax assessments are at exactly 100% of the  market value of properties.  Second, we will assume that both Harrisonburg and Rockingham County are comprised of 1,000 privately owned homes.  Third, we will assume that all homes have market values (and assessed values) of the median sales price.



As shown in the table above, the median sales price in the City of Harrisonburg declined 20% between 2008 and 2012 from $213,500 to $170,000.  If the City of Harrisonburg were comprised of 1,000 median-priced homes, the tax base and thus the tax revenue would also decline by 20% from $1.26M to $1M.  Even with the proposed $0.04 proposed increase in the tax rate (from $0.59 to $0.63) the tax revenue would still decline by 15% from $1.26M to $1.07M.  In fact, the tax rate would need to increase to $0.74 (a 25% increase) in order to maintain the same tax revenue as in 2008 --- assuming that assessed values have tracked precisely with median sales prices.



As shown in the table above, the median sales price in Rockingham County declined 20% between 2008 and 2012 from $215,000 to $171,750.  If Rockingham County were comprised of 1,000 median-priced homes, the tax base and thus the tax revenue would also decline by 20% from $1.29M to $1.03M.  Even with the proposed $0.04 proposed increase in the tax rate (from $0.60 to $0.64) the tax revenue would still decline by 15% from $1.29M to $1.1M.  In fact, the tax rate would need to increase to $0.75 (a 25% increase) in order to maintain the same tax revenue as in 2008 --- assuming that assessed values have tracked precisely with median sales prices.
 

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I'm asked quite frequently about the relationship between home values and tax assessments.  After a lengthy analysis of the 528 home sales in Rockingham County during 2011, as recorded in the HRAR MLS, here is what I'm finding....

(click here for the same information for the City of Harrisonburg)
  

click the infographic above for a printable PDF version.

The bottom line here is that County properties seem to be under-assessed by an average of 10%.  Most buyers pay more than assessed value for the properties they purchase.
  

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I'm asked quite frequently about the relationship between home values and tax assessments.  After a lengthy analysis of the 266 home sales in the City of Harrisonburg during 2011, as recorded in the HRAR MLS, here is what I'm finding....



click the infographic above for a printable PDF version

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Rockingham County is considering raising the real estate tax rate from $0.60 to $0.64 per $100 of assessed value (details here).  The City of Harrisonburg is now considering a similar increase, from $0.59 to $0.63 per $100 of assessed value.

The reasons cited for the proposed tax rate changes are increased Virginia Retirement System costs, and decreased property values.  There are a few other tax rates that would change, but here is how the real estate tax rate changes would impact homeowners in the City of Harrisonburg....



Of note, the City's real estate tax rate was $0.62 per $100 of assessed value very recently -- it was adjusted down to $0.59 per $100 of assessed value in the 2008 fiscal year.  Thus, looking at this over six years (2007-2013) this is only an increase of $0.01 per $100 of assessed value -- thus an effective 1.6% increase in the tax rate over the past 6 years.

Click here for the full article from the Daily News Record.

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Some observations without knowing much about the budget:

• Income from property taxes would make up 23% of County revenue in the coming year, up from 21% of revenue in the current budget cycle.
• The overall size of the County budget is proposed to decline -- from $310M to $298M.
• The real estate tax rate is proposed to increase by 7%, from $0.60 to $0.64 per $100 of assessed value.  More details here.
  

  

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As per the Daily News Record today, the Finance Committee for Rockingham County has proposed an increase of the real estate tax rate --- from $0.60 per $100 of assessed value up to $0.64 per $100 of assessed value.

Here's how that would impact a few different price ranges of homes....



In many ways, it is actually surprising that we haven't seen an increase in tax rates before now --- many localities across the country have been forced to do so in order to continue to pay for public services. 
  
Click here for the full article from the Daily News Record.
 

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I have had several people ask me about this in the past week, so I thought I'd clarify.  The e-mail above is an example of what you might hear about -- a scandalous part of the health care bill that will charge everybody a sales tax of 3.8% of their home sales price starting in 2013. 

Is it legit?  Will you pay this sales tax if you sell?  Most likely not.  Let's take a look....

The 3.8% tax is a tax on a very narrow band of investment income for high-wealth households (those who earn $250,000 in a joint return or $200,000 as an individual) that could come into play on the sale of a house if the sales gain is more than $500,000 for a married couple or $250,000 for an individual.

Even in the unlikely event the sales gain is more than that amount, the tax would only apply based on other considerations having to do with the household's income and tax situation. The bottom line is that the tax, which was imposed to help shore up Medicare, will hit only some portion of investment income.  (source here, and more here)

So, here's a quick test to help you understand how wide of an affect this 3.8% tax will (or will not have):

1. Do you have household income above $200K as an individual, or $250K as a couple?  If not, this tax does NOT apply to you.
     
   
2. Did you turn more than a $250K profit on the sale of your home as an individual, or more than $500K as a couple?  If not, this tax does NOT apply to you.
     
   
3. Even if you answered yes to both #1 and #2 (unlikely) there are still quite a few other aspects of your financial and tax picture that would have to be true in order for the tax to apply.

So, back to the original e-mail ---

Will the seller of a $100K home pay $3,800 per this tax?  Absolutely not -- how could they have had a $250K profit if they sold their house for $100K?

Will the seller of a $400K home pay $15,200 per this tax?  It's possible -- if they are single, and they bought the house for only $150K, and they make over $200K/year. 

Hopefully you can see how far from reality the rumors are of this 3.8% real estate sales tax.  Feel free to call me (540-578-0102) or send me an e-mail (scott@HarrisonburgHousingToday.com) with any questions..

 

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Thanks to one of my clients, who pointed this new regulation out to me....

If you own rental property, you must now submit a 1099 form to the IRS and to service providers if you pay $600 or more for the provided service -- such as to a plumber, carpenter, painter, landscaper, etc.

Apparently, the basis for this requirement is to make sure that contractors are not hiding their income.  Requiring that this information from rental property owners will (potentially) reveal more income that should be taxed. 

This goes into effect for 2011 rental property income and expenses, so start keeping detailed records, if you're not already.

Do you love legislation and taxation?  Read more about the Small Business Jobs Act of 2010, which enacts this new requirement.
 

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Somehow, the $8,000 tax credit for first-time buyers is getting all of the attention, meaning that most people don't even know about the $6,500 tax credit available to you if you've lived in your home for five years.

If you have owned your home for five or more years, you will (almost certainly) receive a $6,500 tax credit if you buy your next home by April 30th, 2010.  To clarify -- you must have a contract on the house by April 30th and close by June 30th.

Many people that I talk to who would be eligible for this $6,500 tax credit don't even know that it exists.  If you're in this situation and planning to buy a new house in 2010, you really ought to consider making a move in the first four to six months of the year. 

Click here for more information (from the IRS) about both tax credits.

Again, to try to really drive this point home:  If you've owned your house (and lived in it) for more than five years, you are very likely eligible for a $6,500 tax credit if you buy a new home by the spring/summer.

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I rarely make real estate sales predictions --- mainly because in the rare occasion that I do, I'm usually wrong.  More on this in a few days.  That being said, I believe we're seeing the specific effect of the $8,000 first time buyer tax credit (that was recently extended) here in Harrisonburg and Rockingham County. 

Check out how November sales figures will likely play out . . .



We've already seen 34 home sales in Harrisonburg and Rockingham County in the first 17 days of November.  Compare that to how many occurred in Nov 1-17, 2008 versus Nov 18-30, 2008, and I have extrapolated a final sales count of 65 home sales this November.  I will likely be wrong --- I think it will be even higher.

The second version of the first time buyer tax credit was to end on November 30th, so there are quite a few purchasers already in the queue waiting to close at the end of this month. 

Do you want further evidence? The median sales price of the homes that have sold this month is $177,623, compared to the year to date median of $190,000.  We're seeing more inexpensive (first time buyer type) homes selling this fall.

Any counter prediction out there?  What do you think?  And what do you think we'll see in those typically stagnant months of December and January??

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Warning: This analysis, though numerically and statistically based, is an abstract answer to a nearly impossible question.



The question, raised today by Chad, is whether the first-time buyer tax credit (that was set to end on November 30, 2009 but has now been extended) has pulled any additional buyers into the market.  I say.....maybe, but....

The chart above shows how I attempted to answer that question.  For each year between 2000 and 2009, I determined the percentage of home sales that were at or below 80% of the median sales price that year.  We can assume that most first time buyers are going to be in that general price range (under $93k for 2000, and under $152k for 2009).  The chart, thus, shows how that segment of the market has fluctuated in relative size over the decade that is coming to a close. 

As you'll notice, the portion of supposed first-time buyers dropped off between 2005 and 2007 --- likely because home prices were increasing (mostly between 2005 and 2006) and lending requirements were becoming more restrictive (mostly between 2006 and 2007).  But....the trend then reverses starting in 2008, and then continues in that new trajectory in 2009.  There are thus (perhaps) more first-time buyers in our market today because of the tax credit, then there otherwise would have been.  Yes, I know --- lots of mental leaps there.

The additional caveat that I offered Chad is that while I believe the first-time home buyer tax credit did and is pulling buyers into the market now who might have otherwise waited until 2010 or 2011 to purchase --- I also think there have been first-time buyers that would have purchased in 2008 and 2009 that were waiting because of the economy.  Thus --- the tax credit is borrowing buyers from the future who really would have been today's buyer anyhow.

Again --- all of this is largely speculative, as I can't truly tell you the number of first-time buyers in our market, but hopefully this analysis sheds a bit of light on the topic.  I welcome your suggestions for additional analysis to answer this question.

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THE NEW TAX CREDIT IS COMING, THE NEW TAX CREDIT IS COMING!
The House has passed the bill, as has the Senate, and the President may sign it as soon as tomorrow (November 6, 2009).  That's right --- the tax credits for home buyers are continuing --- and now they are being applied more widely.

FIRST-TIME BUYERS
You now have several more months to buy your new home --- you don't have to close by Nov 30 / Dec 1.  In fact, as long as you have the property under contract by April 30, 2010, you'll have until July 1, 2010 to close on the property.  The tax credit is still $8,000 with several imitations on income, home price, etc.

LONG TIME RESIDENTS OF SAME PRINCIPLE RESIDENCE
There's something for you too!  If you have owned and used the same residence as your principal residence for 5 (consecutive) years out of the last 8 years, you will likely be eligible for a $6,500 tax credit.  The deadline for closing is July 1, 2010 (as long as the property is under contract by April 31, 2010.)

TIMING
One important note here on timing --- if you're a first-time buyer, this new bill just extends your deadlines.  If you're a "long time resident of same principle residence" you'll can close on your new house (and be eligible the tax credit) as soon as the bill is signed into law.  That is to say that if you're a move-up (or down) buyer ready to close tomorrow (November 6th), you might want to wait another few days for the President to sign the bill.  You'll enjoy an additional $6,500 net gain --- in the form of a tax credit.

INCOME LIMITS
The new income limits are $125,000 for single buyers and $225,000 for couples.

THE ACTUAL LEGISLATION
Interested in the details of the actual bill?  Click here.

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First, here's how to calculate your gain or loss on the sale of your investment property....

Selling Price - Purchase Price - Purchase Costs - Improvements - Selling Costs + Depreciation

You may have heard of short-term and long-term capital gains --- the difference is in the timing....

If you sell an investment property within one year (including one year exactly) of purchasing it, your "short-term capital gain" will be taxed at the same level at which your ordinary income is taxed.  This could be at a rate as high as 35%, but depends on your income level.

If you sell an investment property after one year of owning it, your "long-term capital gain" will be taxed at either 0% or 15%.  If you (as an investor) are in the 10% or 15% income tax bracket, you will pay 0% (yes, that's right, no taxes) on your long-term capital gains.  If your income tax bracket is above 15%, you will still only pay 15% tax on your long-term capital gain.  This is important to note, as an investor might pay a 25% tax on their ordinary income, but can pay significantly less (only 15%) on their income (long-term capital gains) on investment properties in that year.

Of note, these tax rates (0%, 15%) only last through the end of 2010 given current legislation on the books.  If they aren't extended, they will revert back to the previous tax rates of 10% and 20%.

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If, as a first time buyer, you close on your purchase of a home by November 30, 2009 you will receive an $8,000 tax credit on your 2009 taxes.  That is to say that:

• if you owe the IRS $8,000 you won't have to send them a dime
• if you owe the IRS nothing, you'll get an $8,000 check
• if you are owed a $2,000 refund, you'll get $10,000!

But this only works for you as a first time buyers if you close on your new home by November 30th of this year. 

Most homes take 45 to 60 days to "close" -- in other words, it is usually 45 to 60 days after a house is under contract that the closing can take place.  That means first time buyers ought to have their house under contract by September 30th in order to have time to close.

And if you're planning to have a contract on a house before September 30th, NOW is the time to start looking.  Lots of first time buyers are certainly in the market right now --- I'm working with quite a few, and I hear stories of many others as well who are buying --- but I believe there are quite a few other first time buyers who are still sitting on the bench.

If you have questions about the $8,000 first time buyer credit, or if you're ready to start looking at properties, call (540-578-0102) or e-mail (scott@HarrisonburgHousingToday.com) me and we'll get started!

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In talking to one of my clients today, he commented that he thinks a lot of potential buyers have forgotten all about the $7,500 tax credit.  I agree!  Here is a quick reminder of the basics...

If you haven't owned a home in the past three years, you have a great opportunity to save $7,500 on your 2009 income taxes.

To pull of this credit you'll need to buy a home before July 1, and you'll then be able to claim the $7,500 tax credit on your return that you would file at the beginning of next year.

There is some fine print, available at the IRS web site, which includes the fact that you will be paying the $7,500 back over a 15 year period.  It is rumored that the repayment aspect of this tax credit may disappear as a result of upcoming economic stimulus changes, and even if it doesn't, you still will have a net savings of over $4,000.

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Over the past few weeks I have been explaining to many first time home buyers that if they buy a home before July 1, 2009 they can take advantage of a $7,500 tax credit.

Some, though, have been less than enthused because the full $7,500 tax credit has to be repaid over 15 years.  Yes, that's right --- even though you will pay $7,500 less in taxes for the tax year in which you make your first home purchase, you do have to repay these tax savings in years three through seventeen.

I thought I'd take a look at the value of what is essentially an interest free $7,500 loan.  For this analysis, I am examining the aggregate savings from not paying interest on the $7,500, using a current interest rate of 6%.


As you can see --- over the course of the 17 years, you save a total of $4,050.  Thus --- even though you are paying back the $7,500 tax credit, it is still at a significant ($4,050) savings.

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Currently, property owners in the City of Harrisonburg are taxed at a rate of $0.59 per $100 of assessed value. In other words, a $225,000 home is a tax liability of $1,328 per year.

Thus, since real estate values almost always increase in Virginia, unless the City lowers its tax rate, taxes will also almost always increase!

And so, this year (2008), the City of Harrisonburg finds itself going through the process of notifying Harrisonburg property owners that they are proposing a real property tax increase. No, they aren't increasing the tax rate ($0.59), but the effective taxes will increase because of increased property values.

Here are the details of the changes in the City:

• Property Assessments increased by 6.45% between 2007 and 2008.
• To keep the sum of the tax liability for all property owners the same as last year, the City would have to lower the tax rate from $0.59 per $100 of assessed value to $0.5543 per $100 of assessed value.
  
• Thus, the effective rate increase is the difference of these two tax rates, an increase of $0.0357 per $100 of assessed value, which is a 6.4% tax increase.
  

Certainly, some property owners will see more (or less) of an increase in their tax liability -- but as a whole, by keeping the tax rate at $0.59, the City is increasing taxes by 6.4%.

Do you have questions or opinions about this tax increase? You are welcome to voice them here on my blog, in the comment section. Additionally, a public hearing will take place on May 13, 2008 at 7:00 PM in the Harrisonburg Council Chambers located at 409 South Main Street, Harrisonburg, Virginia.

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The current tax rate for real estate in Rockingham County is $0.58 per $100 of assessed value. 
($200k home / 100 * .58 = $1,160 annually). 

The proposed budget for the 2008-2009 fiscal year would increase property tax rates for the 2008 calendar year by $0.02 to $0.60 per $100 of assessed value. 
($200k home / 100 * .60 = $1,200 annually). 

To see for yourself, scroll through the budget below until you get to the bottom section where I have circled the tax rates in red.  For a more detailed view, click on the budget to download a larger image.

To inspect the budget, visit the County Administrator's Office at 20 East Gay Street in Harrisonburg.

To provide feedback to the Board of Supervisors, attend the public hearing on April 9, 2008 at 6:00 p.m. at Turner Ashby High School, in Bridgewater.

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The assessed value of a property is the value assigned to the property by the local assessor's office, for the purpose of determining how much you will pay in taxes.  Harrisonburg has a great "Understanding Assessments" guide on the Commissioner of the Revenue section of their web site.

How to determine the assessed value of a property:

For Harrisonburg, visit the new Real Estate Information System to view assessed values for properties, and lots of other property information.

For Rockingham County, visit their GIS web site, where you can search for a property, and obtain its assessed value.

Additionally, if you have trouble with either of these systems, feel free to e-mail me (scott@cbfunkhouser.com) --- I look up assessed values quite frequently, through both of the systems above, and through the MLS.  I'd be happy to look up a property for you and e-mail you back with the assessed value. 

Real World Assessments

Let's take a look at a few real world assessments compared to recent sale prices to see how they compare, starting with the three real estate closings from the past few weeks in our MLS for Harrisonburg . . .

1064 Meadowlark Drive (closed 1/2/2008) Sale Price = $155,000 Assessed Value = $149,500 (96.5%) 1159 Westmoreland Drive (closed 12/27/2007) Sale Price = $265,000 Assessed Value = $204,300 (77.1%) 80 Maplehurst Avenue (closed 12/27/2007) Sale Price = $312,500 Assessed Value = $229,600 (73.5%)

1090 Oakdale Court (closed 1/3/2008) Sale Price = $167,000 Assessed Value = $144,000 (86.2%) 4765 Lawyer Road (closed 12/28/2007) Sale Price = $270,000 Assessed Value = $180,900 (67.0%) 126 Wilson Way, Massanutten (closed 12/28/2007) Sales Price = $325,000 Assessed Value = $299,000 (92.0%)

It becomes clear that there is not a magical percentage that can be used to determine the market value of your home based on assessed values. 

Finally, here's one example of a house (that I am marketing) that is for sale at a price below the appraised value:

6210 Dotts Lane, Penn Laird (click here for details)
Asking Price = $319,000
Assessed Value = $333,200
With amazing views, a large lot, a private neighborhood, schools in close proximity, superior construction quality, and a price below appraised value, it is a great opportunity!

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