Thursday, January 24, 2008

Avoiding Tax Bill Surprises

Tony Ieronimo was a conscientious consumer when he looked for a home in Montgomery County in 2005.

He analyzed his finances, visited many properties and read all the documents carefully. He even asked his real estate agent whether the amount listed under "taxes" on the flier advertising the home he ended up buying was in the ballpark of what he would pay, and was told yes. However, when he received his first property tax bill, he was stunned that the amount was 40 percent higher.

To end this "tax jump" surprise, which occurs regularly in Montgomery County (and in other parts of the state), I introduced Montgomery County Bill 24-07, which the County Council unanimously approved Dec. 4 and which County Executive Isiah Leggett (D) signed into law Dec. 14. The law, which will take effect April 1 requires that a seller or his or her agent give prospective home buyers the best available estimate of what the new tax bill would be for the first full tax year they own the home. The law requires that a seller or agent provide the estimate on any material they produce or distribute advertising the home's sale.

It is crucial that prospective home buyers have accurate information about what their property tax obligations will be if they purchase a particular home, so that they can make informed decisions about whether they can afford to buy -- and stay in -- the home.

Currently, such information is rarely provided. Usually, What is usually listed on real estate fliers under "taxes" is the amount of taxes the current owner pays, not the substantially higher tax bill likely to be awaiting a new owner. This is misleading, comparable to going to a store and seeing the price the store owner paid for an item rather than what you would pay at the counter.

The reason for this "tax jump" is that the Maryland's Homestead Tax Credit does not apply during the first year after a home changes ownership. Homeowners who stay put for more than a year are protected from increases of more than 10 percent annually in the value of their home that is subject to state, county and any municipal property tax.

In times of skyrocketing home assessments, such as in recent years -- and for years after because of the residual impact -- the Homestead Tax Credit saves homeowners who stay put thousands of dollars. However, when a home changes ownership, the new owners are facing property tax bills that are $2,000 higher than what current owners would owe if they stayed.

The law requires that the County's Office of Consumer Protection provide assistance to sellers and agents. The office also will be responsible for enforcing the law. Sellers and agents who use a method recommended by the county to calculate the required property tax bill estimate, which includes the fees on property tax bills, are protected by the law from legal liability.

Although home assessments may taper off or decline somewhat in the future, the very large increases in recent years will all but ensure that, for the next several years, most new homeowners will pay much more in property taxes than the current owner. Ensuring that prospective home buyers have accurate information about their property tax obligations, as the new law requires, will help them avoid getting in over their heads on the largest financial investment most will ever make.

Phil Andrews

(D-Gaithersburg-Rockville),

Montgomery County Council