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Quick Tips on Property Tax
This blog is meant to serve as a general summary of property taxes in Alabama and is meant to be used for educational purposes only. This blog was not written by a tax professional and nothing in this blog should be used in place of actual tax/legal advice. Please contact an attorney or a CPA if you need tax advice.
When it comes to property taxes, Alabama has the second lowest property tax in the United States, only trailing behind Hawaii. It’s nice to be able to brag to your out-of-state clients that when they purchase property here they will automatically be saving money on property taxes. Conversely, the state with the highest property taxes right now is New Jersey.
Our tax year begins on October 1st and runs through September 30th. On your settlement statements or closing disclosures for your closings you’ll see your taxes prorated out on a per day basis; it's important that buyers and sellers only pay taxes for the time they owned the property. It’s very important to solve property tax issues before closing because taxes run with the land. This means that if there are unpaid taxes on a property, it’s the current owner’s problem; selling a piece of property means that any tax liens on it will become the problem of the next owner if they aren’t paid by closing.
The type of tax we deal with when it comes to property is called Ad Valorem, which covers a few different areas including real estate, cars, and personal property. Ad Valorem is Latin for "according to value." What it means is that something is being taxed according to the value of the thing itself.
In real estate we find this value by looking at the appraised value according to the tax assessor, or the assessed value. We then multiply that value by the property classification. The state classifies property into four categories, and this is how they get your assessed value. They will then multiply the assessed value by the millage rate, which combines your state, county, school, and city/municipal taxes all into one number. The millage rate can be itemized out, and if you’re curious to see what taxes you’re paying when you pay your property taxes, you can look up your local millage rate since the state publishes all of those. A mill is a unit equal to one tenth of one cent ($0.001) or $1 per $1,000 you pay. The state, county, and school district may all ask for a different number of mills, so your millage rate combines all those into one for your specific area.
Once we have our tax amount, we can reduce it with the homestead exemption. Oftentimes we just use the term “homestead” to refer to a combination of things: it includes our property classification, which is a very important thing to get changed over, as well as the tax reduction, which is the proper homestead. A standard homestead in our area is only going to give you a reduction of $48, which isn’t a huge savings, but it’s an important one. When we talk about major savings regarding homestead, we’re usually talking about getting the property classification changed, which will allow you to claim homestead and second homestead in order to reduce your property taxes on multiple properties.
You have 4 basic property classifications. The ones we care most about in this blog today are the second class and the third class.
The second class is our standard rate in this area, which is 20% for property. This is the amount you’ll be taxed at by default if you don’t tell a tax assessor what you are. What we want to be is a class 3 for residential properties, which is a tax rate of 10%. When I say residential I mean family-owned, owner-occupied, you’re living there as your primary home. You cannot be renting it or using it as commercial property as that would bring you right back up to class 2.
In order to determine your assessed value, you multiply the appraised value of your home by the classification percentage. For example, a home valued at $100,000 would look as follows:
$100,000 x 20% = $20,000
If you changed the same property to a class 3, owner-occupied residential property, your assessed value would instead be as follows:
$100,000 x 10% = $10,000
Usually at the closing table I’ll tell people not to forget to claim homestead because it cuts their taxes in half. This classification change that moves you from 20% to 10% is what I’m referring to.
Madison County provides a list of all the local millage rates online. The rate does change depending on the city because, as we talked about, they include the city-specific taxes for your property. If I wanted to calculate the taxes for Huntsville, I would take the property value ($100,000) and multiply it by our classification (20% by default) and then multiply that by our millage rate (0.0580), and that would give us our taxes for the year.
$100,000 x 20% x 0.0580 = $1,160
By getting the class 3 status change, we can change our classification from 20% to 10% and reduce our taxes by half.
$100,000 x 10% x 0.0580 = $580
If we also add in that $48 official homestead exemption, we can reduce our taxes even further.
$100,000 x 10% x 0.0580 - $48 = $532
This is your real homesteaded property tax rate and is what we try to get all our new home buyers into.
Once you claim homestead, your property has the class 3 classification. You can’t get homestead without the class 3 because they go hand in hand, so we usually only tell people to get their homestead as it isn’t necessary to worry about the class 3. What confuses people is getting their second-home homestead. This is especially important if we’re nearing the end of the year and are in the August, September, or October timeframe because a lot of people end up buying their new house before they sell their other one. If you lose your tax status on one property because you’ve moved your homestead to a new house on, say, September 28th, once October 1st hits the tax assessor will remove your homestead completely on the previous property and it will be non-homestead for the entire following year. This means that when you do try to sell it, your taxes will be prorated on a much higher basis and both you and your buyer will be paying a lot more than you should be. This is why it is so important to get that class 3 home status with either homestead or second-home homestead on any home you’re holding on to that you aren’t renting out.
You can have multiple homes in the class 3 range, but you can only have one home that is homesteaded. How many homes you can have in a class 3 is debatable depending on who you’re talking to and what county you’re in. Most counties I’ve dealt with agree that you can have at least one other property that is in the class 3 section, which allows you to have second-home homestead. It may be a home that you vacation in but that you don’t rent, or you may just own two homes at one time, for example if you purchase a new house before you sell your last house and there is a short period of overlap. In this case, both those properties can maintain the class 3 status; you can move the homestead over to the new home you’re living in, but make sure the old house retains its class 3 status. You can discuss exactly how to do this with your tax assessor.
One important thing to note is that land only is taxed differently than if it is developed.
Generally there are 4 different types of homestead that you can qualify for.
- H1 - standard that everyone qualifies for
- H2 - extra exemptions for age, disability, and lower incomes
- H3 - extra exemptions for age, disability, and lower incomes
- H4 - extra exemptions for age, disability, and lower incomes
What we’ve been talking about so far is that H1 status (the $48 reduction), which generally everyone qualifies for. If you have clients who are older, disabled, veterans who have been assessed for disability, or clients in lower income brackets, these clients can speak to their tax assessor to see if they qualify for H2, H3, and H4, which are larger homestead exemptions. H3, for example, is a complete exemption -- if you get this then you won’t pay any property taxes whatsoever. Always advise your clients to speak to their tax assessor to see if they qualify for any other significant discounts when it comes to their property taxes. Every county is a little different in terms of what they require for each of these homesteads (ie. documents to prove the client's age, disability, etc.), so it’s important that they speak with the tax assessor for their area.
In order to qualify for homestead, you have to have lived at the property before October 1st. If you apply for homestead before October 1st then you typically will only need to show your updated driver’s license (must have your new property address) and deed to prove the date you began living there. If you lived there before October 1st but don’t apply until after October 1st, you will also need to bring your homeowner’s insurance policy and a utility set date letter to show what date you began using the property as your primary homestead. Technically you can apply for homestead up to December 31st, so it isn’t really a big deal if you wait a bit to do it, but you will have to show this additional documentation. Typically you can get a property reassessed -- not usually for homestead, but for class 3 certification -- even up to 2 or 3 years after. I have had clients who had forgotten to change their classification, and we always just tell them to go speak with their tax assessor and have their insurance and utility set date letter and just explain their situation. Usually they will still work with you and give you either a rebate or a credit or some sort of benefit for having homestead during that period of time where you hadn’t properly applied.
HELPFUL LINKS
Where do I apply for homestead?
https://www.gkmiddletonlaw.com/blogs/home-sweet-homestead
Madison County Property Appraisal & Tax Payments
https://madisonproperty.countygovservices.com/Property/Property/Search
Madison County Tax Assessor’s Parcel Viewer
https://isv.kcsgis.com/al.Madison_revenue/
Tax maps to make sure you have the correct property -- very beneficial if you are working with a property address such as 00 Property Rd.
