As a homeowner, you realize you have to pay some bills to keep your property. Other than the regular property taxes, many investors may not know about special assessment taxes. 

So, what is a special assessment tax? What are some examples of a special assessment tax? Today, we seek to answer these questions. Stick with me to the end.

What Are Special Assessments In Real Estate?

In real estate, a special assessment tax refers to the fees a local government levies on property owners for neighborhood projects. Some public projects, such as sewer and water lines, street lights, and fire protection benefit property owners within that locality.

Where does this tax go? A special assessment tax goes towards a specific geographic region, called a special assessment district. Property owners within that region who’ll benefit from the projects are the ones who pay the special assessment tax.

This type of tax is a non-ad Valorem tax and, just like real estate taxes, is based on the property’s assessed value. Special assessments may recur for a fixed period. They are also not tax-deductible. 

Prospective homebuyers are advised to visit the local county assessor’s office to establish whether the local government agency has levied a special assessment on property within the area. You don’t want to settle in your new home only to discover you have more bills to pay that you had no idea about.

What is the Difference Between a Special Assessment Tax and Property Taxes?

Difference Between a Special Assessment Tax and Property Taxes

Property taxes are paid to the city, county, and state governments based on the value of a property. These governments collect property taxes from every home within their borders.

Property taxes are often the second largest expense of owning a home, after mortgage interest. The amount you pay annually is calculated by applying a specific tax rate to the property’s assessed market value.

Local governments have recently required subdivision developers to take part in ensuring that there is long-term funding for schools, parks, emergency services, and other amenities. This is why they levy special assessment taxes.

In short, special assessment taxes are there to avoid draining existing municipal services from the influx of homes. The amenities are located within the subdivision and are paid for by the special assessment taxes.

Special Assessment Liens

The state or local government agency assigns a special tax which is in a form of a special assessment lien. There’s a small interest rate associated with each property tax bill.

An assessment search before buying a property will be helpful since it’s possible to find a property with an unpaid assessment. In some cases, the home changed hands before the assessment was paid and the new owners never go to know about it.

Liens are legal tools that protect the interest of the local government and ensure that all property owners pay the special assessment. If a government agency has a lien, it holds a legal claim against a property.

Which Authorities Impose Special Assessment?

As we’ve seen, the state and local governments are the main organizations that collect the special assessment tax. However, homeowners’ associations (HOA) and condominium owners’ associations (COA) that oversee condos, townhouses, and other types of properties, may levy special assessments to their owners. This is determined by the board of directors and also goes to facilitate special public improvements.

State civil codes that regulate HOAs instruct the bodies to list the fees involved with special assessments in their governing documents. Some lenders also include special assessments in the property’s sale contract. 

Why do these bodies impose special assessments? 

HOAs and COAs do this to facilitate community development projects that may include landscaping or constructing new common areas. If there has been a natural disaster and there’s a dire need for repairs, a special assessment will come in handy since normal dues can’t settle the repairs.

Special assessments by HOAs and COAs may be controversial since they’re unpredictable and add to the expenses and bills associated with living in a certain community.

What Are Some Common Types of Special Assessment Tax Districts?

Here are some common types of special assessment tax districts:

  • Special Improvement District (SID): This is the most basic kind of community assessment district. In a SID, the taxes are collected to fund certain improvements within the area. While the process of creating a SID varies in every state, most property owners within a district must rally together to petition the local government to create a district for them.
  • Business Improvement District (BID): These districts are created in sections of towns where business activity is heavy. The function of these districts is to help boost commercial activity by funding improvements within the business district. These districts typically function as independent non-profits instead of government agencies.
  • Transportation Improvement District (TID): This district is a zone within which property owners are imposed taxes to fund public transport projects. Transport projects tend to raise the value of properties in the area. As such, property owners are encouraged to pay special assessment taxes related to transport improvement.
  • Neighborhood Improvement District (NID): This district collects state and local taxes to fund developments within a certain neighborhood or community. NIDs are common in historically rich or residential-heavy neighborhoods. Just like BIDs, NIDs are run by independent non-profit.

What Are Some Examples of Special Assessment Taxes?

Special assessment districts may be established since the property taxes collected aren’t enough to fully fund the municipality. For instance, a special assessment tax may be necessary if the population within the municipality has drastically declined and there’s a need to continue operating the schools, library, or police department.

To help you understand special assessment taxes better, here are some examples:

  • Infrastructure: These special assessment taxes go towards the construction or repair of projects that are considered public improvements. Such projects include water and sewer lines, street lights, recarpeting of roads, paving of sidewalks, and many others.
  • Nuisance Abatement: Special assessment taxes may sometimes be used for nuisance abatements, such as building codes, fire codes, zoning, and any other means that will improve the safety and quality of life of people living within that community.
  • Recreational and improved areas: Facilities such as nature trails, parks, playing fields, playgrounds, skateboard parks, and other open spaces may be facilitated by special assessment.
  • Mello-Roos: Mello-roos is a special assessment district created in California that finances infrastructure projects. What happens is that a county or city sells bonds to raise funds to finance the projects. The property owners within the city or county that stands to benefit from the project pay the bond debt as tax.

As you can see, special assessments are typically used to cater to the extraordinary expense that comes with funding a community project. The tax could go on for a set number of years. However, once the project is completed, the tax is discontinued.

How Do Local Government Special Assessment Taxes Work?

Here’s how a special assessment works:

  • A state or local government assigns a special assessment district: cities, counties, and other state and local authorities create a special assessment district and assign it certain neighborhoods or areas within the municipality. The work of the special assessment district is to help raise capital for funding public projects. The assignment is based on whether the property will directly benefit from the improvements. 
  • The agency creates a resolution: The agency that creates the special assessment district drafts a resolution of intention. This resolution includes the district name and the proposed improvement. It also states the time and date set for a public hearing. The agency then mails ballots to every homeowner within the district. As part of the assessment process, the agency also gets an engineer’s report.
  • The agency organizes a public hearing: A public hearing, attended by property owners, the county board, city council, or agency legislative body, is held. The engineer’s report is tabled during this hearing. The report usually contains an analysis of the project and the assessment tax each property owner will pay. After that, the homeowners will submit their completed ballots and a vote tally will take place. If the majority vote in favor of the improvement, the agency will assign the assessment district. However, the agency sets a timeframe that allows property owners to dispute the improvement and seek legal counsel.
  • Taxes are collected: The agency then assigns the assessment tax in the form of a lien with a favorable interest rate to each property tax bill. Homeowners who fail to pay may result in foreclosure proceedings on the lien.

How Do HOA Special Assessment Taxes Work?

Homeowners’ association special assessment works in the same way as local government assessment, only that in this case, the HOA collects the tax instead of a government agency. 

Most HOA boards set aside a portion of the HOA fees in a reserve account to cushion for unforeseen circumstances and emergencies, or to cover large expenses, say constructing a new clubhouse. 

However, the money in the reserve account is not always enough, due to a shortfall or budget error. In this case, the HOA board must impose an assessment tax on the property owners.

The HOA’s conditions provide guidelines on how the assessment tax will be levied. For example, many HOAs require membership approval from the majority of their members. Others simply need advance notice.

Property owners who fail to meet the special assessment’s monthly and annual installments will be met with an attempt to begin foreclosure or a lien on the property.

Are Special Assessment Taxes Deductible?

It’s common for homeowners to ask whether they can get property tax deductions from special assessments.

The IRS stipulates that property taxes are deductible only if they’re imposed uniformly on all properties in a certain area. As such, special assessment taxes are not deductible from federal taxes if they benefit a certain area, say only a portion of a community instead of the entire municipality.

In short, if the project is benefiting the entire community, it may be tax-deductible.

Also, always keep in mind that the imposed special assessment tax has tax benefits since the improvements will increase the property’s value.

How Do You Find Special Assessments on a Property?

As a prospective property buyer, you want to know whether there are any special assessments imposed on the property to avoid any surprises. One of the major issues with special assessments is that you can easily lose track of them on a property.

In many cases, special assessments are available in the public records of every county. However, this isn’t always the case. If you can’t find them in the public records, start by checking your local county assessor’s records.

If you’re aware of the chain of title, you can do the current owner’s name search in the clerk of court to find the special assessment tax.

If all these options don’t work, you can get an official special assessment search, payoff request, or municipal lien search from the government agencies with the authority to levy such an assessment.

The Bottom Line

Special assessment taxes catch many new property owners off guard. Many have no idea what they are and why they’re levied.

Basically, a special assessment tax is a special tax imposed on property owners to fund projects that benefit the community or neighborhood. Such projects tend to raise the market value of properties within that area. The improvements may include water and sewer lines, street lights, and fire protection services.

Special taxes are imposed when a state or local government agency forms a resolution for the project and sets a date for a public hearing. During the public hearing, the property owners can either vote in favor of the project or delay it as they seek legal advice. Once passed, the taxes are collected by the municipality based on the assessed value of properties through an assessment district.

Wise and successful real estate investors understand that this business is a numbers game. As such, they always implement various smart strategies to stay on top of the game and ahead of the competition. One of these strategies is to use Mashvisor’s real estate investment property calculator to get detailed ROI calculations and cash on cash return estimates. Sign up for Mashvisor now and get 15% off

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