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Buying a Fixer-Upper? Beware This Property Tax Pitfall – The Motley Fool

Image source: Getty Images

You could get stuck with a higher tax bill.


Image source: Getty Images

You could get stuck with a higher tax bill.

Key points

  • Buying a fixer-upper could mean scoring a home at a lower price point.
  • But you could end up spending a lot more over time, and not just on improvements.

If you’re in the market for a new home, you’re probably aware that property values are sky-high right now. And mortgage rates have also risen a lot this year. That means you could end up having to spend a lot of money on a mortgage for a new home.

But you might snag a deal on your home’s purchase price if you’re willing to buy a fixer-upper. Homes that aren’t in the best of shape don’t tend to command the same higher prices as updated ones. And while buying a fixer-upper could mean having to sink a bunch of money into renovations, the upside is that you get to put your own stamp on your home.

But if you’re going to purchase a fixer-upper, it’s not just renovations you’ll need to budget for. You may also need to plan on higher property taxes than you start out with.

Why your property tax bill could climb

Property taxes are calculated by taking a home’s assessed value and multiplying it by whatever local tax rate applies. The work you do on a fixer-upper won’t impact the latter point — your tax rate is set by local government and has nothing to do with your home versus any other home in your neighborhood.

But the work you do on a home could change its assessed value. And that could, in turn, cause your property tax bill to rise.

So, imagine you buy a home that’s in disarray or hasn’t been updated in years. At the time of your purchase, your home might be assessed at $200,000. Meanwhile, if your local tax rate is 1.5%, that leaves you with an annual property tax bill of $3,000.

But let’s say you decide to pretty much gut that home and improve it substantially. You might put in a new kitchen, redo the bathrooms, rip out old flooring and replace it with hardwood, and finish the basement.

All of that work could easily double the value of your home so that at its next assessment, its value is determined to be $400,000. Suddenly, you’re looking at a $6,000 …….


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