My House, My Tax Burden


By Ellen Hoffman If you've owned a home in Alexandria, Va., or Virginia's Fairfax, Loudoun, or Prince William counties over the last few years, congratulate yourself on a great investment. According to data compiled by The Washington Post, the value of the average home in these areas is estimated to have increased from 114% to 131% since 2001.

But home values aren't the only thing that has increased in the area. Real estate tax bills are up anywhere from 58% (Prince William County) to 111% (Loudoun County). Such hikes in both property values and tax bills aren't uncommon in the country's hot housing markets (see the federal government's latest data on housing price increases in metropolitan areas).

CUMULATIVE COSTS. If your household earns a comfortable living, chances are the rising tax bills haven't crimped your lifestyle. But what about when you retire? Assuming that real estate taxes will never go down -- at best, they could level off -- that bill could look mighty scary when you're not making your current salary.

Real estate taxes have long been the bane of retirees, especially those with modest incomes. But with the recent housing boom, the prospect of retirees becoming house-poor is a growing concern.

Certainly, property taxes alone won't necessarily break your retirement budget. And most states have some type of tax credit or deferral program. But real estate taxes can pose a problem when coupled with other home-related expenses such as maintenance and insurance, plus increased medical bills -- a near-certainty for retirees. Regardless of whether you plan to stay in your current home, take the time to consider how these taxes might affect your future budget.

GET THE ANSWERS. Real estate taxes are "state-regulated" and related to market values, which are based on the sale price of comparable properties, explains Susan M. Wachter, a professor of real estate and finance at the University of Pennsylvania's Wharton School. But the tax bill for your modern condo or renovated Victorian is ultimately the result of other factors, including the tax rate your municipality and/or county decides to levy, special taxes for schools, and levies on other local facilities and services.

The Retirement Living Information Center gives general information about each state's tax picture, including property tax levels and rules as well as tax breaks. But to pin down the details of your situation, Jim Poterba, an economics professor at the Massachusetts Institute of Technology, advises contacting your local government's tax office for an explanation of your current property tax bill, rules for calculating the bill, and estimates of how much the tax might increase as the value of your property rises.

He notes that the fair-market-value assessment determining how much tax you pay may lag several years behind market prices. Often, the sale of a home prompts a reassessment that can lead to a significant tax increase. So if you're considering buying a new residence, he suggests you ask whether the transfer of the property will cause a spike in the real estate tax.

CONSIDER ALL OPTIONS. One potential solution to escalating taxes is a reverse mortgage. Edmund Woolridge, a retired U.S. Navy captain, lives in a four-bedroom house in Annapolis, overlooking Chesapeake Bay. He bought it for $66,000 in 1970, and it's now worth about $1.2 million. He found that the $6,000 annual property tax bill was a burden, so he opted for a reverse mortgage, which allows a homeowner to trade home equity for either a lump sum or a series of cash payments.

To qualify for a reverse mortgage, you must be at least 62 years old and have at least 50% of your outstanding mortgage paid off. This type of mortgage has complicated rules, and to be eligible, you must remain in the mortgaged property. You'll also incur closing costs, but this can be a good way to boost income or build your bank account. The AARP offers consumer information and advice at its Web site on this option.

For one 79-year-old woman, the answer was selling a rental property she owned to her children. Financial adviser Nancy Flint-Budde of Salem, N.Y., describes this client as a classic case of someone who was house-poor. She was spending 60% to 80% of her income, derived from Social Security and a small pension, on property taxes for the rental property and her own home. Following Flint-Budde's advice, she sold the rental house to her children. Although she had to pay taxes on the capital gains, the retiree generated several hundred thousand dollars for herself -- and the property remained in the family, which was important to her.

DON'T DELAY. Other solutions to the tax problem include moving to a less-expensive home in your same neighborhood or relocating to a place where the overall cost of living is lower.

Any real estate you own is very likely one of your most biggest assets -- but it's important to remember that it also carries very real costs. If you take a good look at it while you're still working, you can figure out how to best manage it when you retire. In addition to writing Your Retirement for BusinessWeek Online, Hoffman is the author of The Retirement Catch-Up Guide and Bankroll Your Future Retirement with Help from Uncle Sam. You can contact her through her Web site, www.retirementcatchup.com


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