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Then, apply the current tax percentage to your proposed purchase price, and, voila! – you have your new estimated tax bill.Īnother issue that investors should be aware of while crunching numbers and determining the best purchase price for a real estate investment is whether there are any tax abatements on the property. However, if no tax calculator is available, you can simply divide the current tax bill by the current market value set by the auditor and get the current tax percentage. In order to determine the new tax burden, many counties have online calculators that can be used to estimate the new real estate tax amounts. Second, if your proposed purchase price is higher than the auditor’s market value, you can usually count on your real estate taxes to increase based on the sale. This is public information that is easily accessible online. So, what can be done to make sure you have solid calculations for your potential investment? First, always check with the county auditor to determine the current market value set by the auditor for tax purposes. This can cause overpayment on investments and (gulp!) negative cash flow. Many investors, even the savviest ones, can forget to take this increase into account by relying on the current tax bill for their cash flow calculations, or severely underestimate the potential tax burden increase. So, if your potential property is currently valued at $2 million by the auditor for real estate tax purposes, and you plan to offer a purchase price of $8 million, you can expect a large increase in the property’s real estate taxes to become effective for the current year, but due and payable in the following year. Many fail to realize that, in many cases, real estate taxes are set based on the purchase price of an arm’s length transaction. This alone causes much confusion when it comes to accurately analyzing a real estate investment, including evaluating the possibility of a new, increased tax burden for the property. This means that the taxes for the current year are not due and paid until the following year, and the amount due is often affected by the purchase price of your future deal. But, in many states, such as Ohio and Illinois, real estate taxes are paid in arrears. Prudent investors should analyze their potential real estate deals based on cash flow, which is the money generated from the property left over after all expenses have been paid, including real estate taxes. With real estate values continuing to climb at historic rates, real estate taxes can be a hidden trap when crunching numbers for a seemingly safe real estate investment.
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Otherwise, a “standard” proration provision in the purchase agreement will force the buyer to pay the tax increase on its own, even for the portion of the year the property was owned by the seller. Prudent buyers should estimate and prorate taxes assuming the sales price as the basis of value for their investment. In Ohio, the sales price is considered the fair market value for real estate tax purposes. Property purchasers often fail to account for the increased tax associated with their prospective sale price when running pro-formas on cashflow.