Unfair Property Taxes and the Real Estate Log Jam

When our property taxes reached $30,000 a year we decided to sell the house. It turned out to be the perfect time. The house sold in 4 days to an all-cash buyer. Right now, there is a “log jam” in the Real Estate market due to high mortgage interest rates. People who have low interest mortgages don’t want to sell because they would have to finance their new house at a much higher interest rate. This means that in many parts of the country there is almost no housing inventory on the market. It is a true seller’s market.

Preparing the house for sale. Selling a house in an upscale area is still a huge amount of work if you want to get top dollar. Before we put the house on the market, we did everything our realtor recommended. This meant fixing anything that was broken, getting rid of any shoddy furniture, and of course, repainting many of the rooms to those all-important “neutral colors”. For some strange reason most people simply cannot picture what a room would look like if it was a different color. Years ago, my wife painted the kitchen bright orange since she finds this color very cheerful. Our realtor took one look at the color and announced that this would take tens of thousands of dollars off the selling price. We had professional painters re-do the kitchen and the dining room (which was a dark green). The rooms were repainted to non-offensive off-white. We did not tell the realtor that we also got rid of a few stones in the backyard that were marking the graves of some beloved pets we had lost over the years. We figured these might just freak out some potential buyers. (See multiple Stephen King novels for reference.)

Unforeseen issues. All the work was a success, and the house sold for top dollar very quickly. However, a lot of the hard work was just beginning. Selling a house requires multiple inspections, some mandated by the town or State, and some requested by the buyer. There is well-water testing, termite inspection, roof inspection, driveway inspection, radon testing, gas and electrical inspection and, of course, inspecting all the appliances that are being sold with the house. Just coordinating all the inspections is a major undertaking.

Then there is the move itself. After 25 years in the same house there was a lot to go through just to decide what to keep and what to discard. It is amazing how much paperwork accumulates. We don’t need tax records from 25 years ago, but I still had them in my files. Much of what we had to get rid of was confidential and needed to be shredded. It turns out that the local UPS store will shred items and charge you by the pound.

The one problem we did not expect was with our mortgage. We had paid off our mortgage many years ago, so we assumed that the normal procedure of paying the mortgage as part of the closing was not going to be a problem. However, the title search revealed that our old mortgage company had not filed all the necessary legal documents with the State so our old mortgage was still showing up in searches, even though we had all sorts of written proof that the mortgage had been paid in full.

In my parents generation, the way to handle this would have been to simply physically go to the bank or mortgage company, have them sign some legal documents and the problem would be solved. However, in the modern world, mortgages are often sold multiple times to multiple financial institutions. Many of these financial institutions themselves have merged, been sold, or gone out of business. It took a lot of work on the part of our lawyer just to find out what company now had the authority to actually certify that our mortgage had been paid in full. Luckily we have a very experienced real estate attorney and he was able to track down the proper company and get the documents filed with the State, showing us free and clear. My recommendation to anyone planning on selling a home would be to do a title search on your own property early in the process, to make sure there are no problems you were not aware of.

Unfair property taxes. Let’s get back to the original reason we decided to move – the property taxes. People from many parts of the country have a hard time believing that the property taxes for regular houses are $30,000 per year. However, New Jersey has the highest property taxes in the nation. (Yea – we’re number 1!) Every New Jersey Governor, Republican or Democrat, comes into office promising to lower the property taxes and every year they go up. The worst blow was when the so-called “Trump tax cuts” were put into effect. This was really just a way of shifting taxes from Republican States to Democratic States. Some income tax rates for top earners went down, but the Federal tax exemption for State and Local Taxes (SALT) was lowered to $10,000. This was a huge increase in the amount of Federal taxes people in New Jersey have to pay. In the political tug of war between Republicans and Democrats, we taxpayers are the rope.

But that is not the worst part of property taxes. The real issue is the property tax structure itself. Most of the money collected in property tax is used ?for the local schools. It is inherently unfair to fund schools through property taxes rather than income tax or a tax based on how many kids you have in school. The system basically penalizes people with no kids or people whose children are no longer in school. People have been saying for years that paying for schools with property taxes is unfair, but the system has not changed. The attitude seems to be that since it has always been that way it has to remain so.

So finally, instead of waiting for the SALT tax exemption to be raised or the property tax school funding system to change, we just decided to sell at a good time. It is a shame too, since we really loved that house. However, we could no longer justify paying $30,000 per year for a school system we don’t use. It could have been worse though. There is another house for sale on the same street our house was on. Their yearly property taxes are $40,000.

The very wealthy have a property tax loophole in New Jersey. There is one way to significantly lower your property taxes in New Jersey. That is by pretending to be a farmer. If 5 or more acres of your estate is devoted to farming, you can declare that property a working farm and pay a much much lower property tax rate. Of course, you first have to be wealthy enough to afford to buy more than 5 acres in the most densely populated State in the Union. (Yes, New Jersey is the most densely populated State. Most people mistakenly believe that to be New York, but much of upstate New York is very rural.) So in New Jersey, a lot of very wealthy investment bankers, doctors and lawyers claim to live on a "working farm." The farm only has to have $1,000 revenue a year to be considered a working farm. So if you sell $1,000 of vegetables a year you can save maybe $40,000 or $50,000 annually on your property taxes.

Donald Trump pretends to be a farmer. Trump's Bedminster New Jersey golf course gets lower property taxes rates than us average homeowners by qualifying as a "working farm." It does this by having a few goats roaming the course. The golf course also sells some mulch periodically. One part of the course avoids property taxes altogether ever since Ivana Trump was buried in a modest (some might say cheap) grave on the course. Cemeteries pay zero property tax in New Jersey. So those are not millionaires and billionaires playing golf in Bedminster. For tax purposes they are farmers and cemetery workers.

The tax assessment shock. The people who purchased our house will be in for a shock in a year or two. Our house sold for a lot more than the current tax value assessment. This means that the next time the home is assessed, the value on which the taxes are based will automatically go up to at least the recent sales price. In recent years, towns have been re-assessing the tax value of homes more and more frequently. This is a sneaky way that the towns can charge higher and higher property taxes while still claiming that they have "not raised property taxes". Yes, they have not raised the property tax rate, but since the assessed value of the home has increased, the actual dollar amount of taxes you have to pay still goes up. It is little comfort that the rate has not increased when your property tax bill comes due.

Even if you have not just bought a house your property tax will still go up. The fact that my old house sold for a lot will not just impact the assessed value of that house. All the houses in that neighborhood will be re-assessed based on the price for which my home sold. The property taxes for the whole neighborhood will be going up. So you can't avoid the higher property taxes by just not moving. If your neighbors move and they get a good price for their house, this will cause your property taxes to rise. This is just one more example of how unfair property taxes are. This kind of "group punishment" does not happen with any other type if tax. If my neighbor gets a pay raise that does not make my income tax rate increase.

The U.S. method of funding schools through property taxes is unusual compared to other industrialized countries. In other countries most of the funding comes from the central and regional governments based on the number of students in the schools. This seems like a much more reasonable method.

It is time for a discussion in many States (especially New Jersey) about how to revamp school funding and lower property taxes. All the way back in 1978, Californians approved Proposition 13, which limits the rate of increase in property taxes and also the rate of assessment increases. It was approved by more than a 2 to 1 margin by California voters, who were simply fed up with outrageous property tax increases. Other States need to enact a similar measure. The only way to get property taxes down is for voters to force them down. Californians showed this to the rest of us 46 years ago.