Special assessment taxes are one of those factors that no one ever tells you about when you’re purchasing real estate.
In this blog, we’ll tackle this often hidden carrying cost and why it is necessary.
Let’s get started.
1. What is a special assessment tax?
Special assessments are charges levied to fund local improvements.
The surtax is levied on owners and helps to pay for specific local infrastructure projects (i.e. construction, road maintenance, water and sewer lines, etc.).
This charge applies only to those properties which benefit from the project.
2. What’s the difference between a property tax, direct assessment, and special assessment?
Let’s look at the difference between these three types of taxes and fees.
Property tax: City, county, and states charge taxes on every parcel of real estate located within their borders.
This is often the second largest expense of owning a property after mortgage interest (if applicable).
These taxes are governed by state law, but are assessed and collected by the county according to the value of the property.
They are calculated annually by applying a certain tax rate to the assessed value of the property.
Direct assessments: Unlike property taxes, bonds and direct assessments are flat fees that are imposed on each parcel of real estate in a jurisdiction after a city or district-wide vote.
This money funds various services that are not covered by property tax revenue.
Some of these services include:
- Street landscaping and lighting
- Public transportation
- Library services
- Pest control
- Parks and recreation
- Violence prevention
- Increase police presence
- Local schools
Special assessments: More recently, cities have required subdivision developers to ensure long-term funding for parks, schools, and emergency services that will directly benefit their subdivision.
This helps to prevent the influx of new homes from causing a drain on existing municipal services.
These dedicated services are located within the subdivision and are paid for by a special assessment.
3. What are examples of special assessment taxes?
Like direct assessments, special assessment taxes include the money necessary to operate schools, fire departments, libraries, or police departments as well as provide services.
Sometimes the tax will go towards a special project like a public recreation center or a park.
The only difference between the two is a special assessment is to pay for local infrastructure specific to a subdivision or district.
Special assessment taxes occur if regular property taxes cannot sufficiently fund the required infrastructure or services.
In either case, the money is dedicated to projects that will benefit the community.
The tax is typically intended to last for a set number of years.
Once that particular project has been paid for, the tax will be discontinued.
4. What is a special assessment tax district?
A special assessment district (S.A.D.) is the neighborhood that will benefit from a given public improvement project to which a tax is apportioned.
It is a geographic area in which the market value is enhanced because of the public improvement that is done.
There are two main types of SADs:
Business and neighborhood districts:
Business and neighborhood districts are run by a local nonprofit entity.
Property owners within these districts must voluntarily impose a tax to fund a set of agreed-upon services and improvements within the district.
You can read more about the specific types of business and neighborhood special assessment districts in #5.
These districts are initiated by the local government and are typically focused on improving infrastructure.
Here are some examples of government districts:
- Transportation Improvement District (TID)
- Special Services District (SSD)
- Community Facilities District (CFD)
- Special Assessment District (SAD)
- Community Development District (CDD)
5. What are the common types of special assessment tax districts?
Below are four of the most common types of special assessment tax districts:
Special Improvement District (SID)
This is the most basic kind of business or neighborhood special assessment district.
In SIDs, additional fees and/or taxes are collected to fund specific improvements within the area.
Every state differs slightly, but in general, property owners within the district must join together to petition the local government to create the district.
Business Improvement District (BID)
Typically, BIDs are created in business-heavy parts of towns to help promote commercial activity by funding improvements in the district.
They also usually function as independent non-profits rather than government entities.
Transportation Improvement District (TID)
This district is a zone in which additional taxes are charged to property owners to fund public transport projects.
Because transport projects often raise the value of properties, property owners are incentivized to pay special assessment taxes related to transit improvement.
Neighborhood Improvement District (NID)
This district collects state and local taxes to fund developments in a specific community.
They’re often created in residential-heavy or historic neighborhoods.
Like a BID, the NID is often run by an independent non-profit.
6. How are voluntary special assessment districts created?
Laws vary in every state, but a voluntary district is typically created when a majority of property owners and/or businesses within the proposed district agree to levy the additional assessment on top of their existing taxes.
Once it is established, this tax must be paid by any property or business owners who live in that area.
When projects or improvements arise, this pool of tax revenue is tapped into for the specific purpose outline.
7. What deductions are available for homeowners?
Because the government allows homeowners to deduct the cost of both state and local real estate taxes on federal income tax returns, you may wonder what type of deductions are available when it comes to special assessment taxes.
The IRS states that property tax deductions are only available if they are imposed uniformly on all properties in a jurisdiction.
As such, special assessment taxes are not deductible from federal taxes if it benefits a defined area (only a portion of the community) rather than an entire municipality.
If a project is seen as benefitting an entire community, it is deductible.
Keep in mind that levied special assessments can still have a tax benefit because the assessments will increase your property value.
You can add what you pay for the tax to the tax basis of your property.
This will ultimately reduce the amount of profit you earn if you sell your own at a gain.
8. What kind of property can be specially assessed?
Not all property can have a special assessment tax levied on it.
Only real estate can be specially assessed versus “personalty,” which is a real estate term that means personal property.
Personal property includes machinery, equipment, furniture, and fixtures.
9. How is it determined how much the special assessment tax will be?
Property owners often confuse property taxes and tax assessments (not to be confused with the special assessment tax).
Tax assessments determine the value of a piece of real estate for tax purposes (or the assessed value).
The actual tax you pay is typically some percentage of the assessed value (the tax rate).
Assessments are determined by local assessors while tax rates are determined by school boards, town boards, city councils, county legislatures, village boards, and special districts.
Like property taxes, special assessment taxes are ad valorem, meaning they are based on the assessed value of the property you’re buying.
If you feel your assessment is too high, it is possible to contest your assessment.
Your assessment can also increase while your taxes can also decrease (and vice versa).
10. How do you find a special assessment on a property?
One of the primary problems with public special assessments is that they’re easy to lose track of on a property.
These types of assessments are usually found in the public record of the county.
However, this is not always the case.
If you’re a new buyer, start by checking your local county assessor’s records.
Assuming you’re aware of the chain of title, doing a name search in the clerk of court on the most current owner may allow you to find the special assessment tax.
However, if neither of these options work, then you’ll need to get an official assessment search, payoff request, or municipal lien search from governing authorities who have the power to levy such an assessment.
11. How does a property owner make payment on special assessment taxes?
It depends on the special assessment.
Some special assessments taxes are paid monthly in small amounts while others are a one-time lump sum charge.
If you’re selling or buying a property, you’ll need to look at the sales contract to see how special assessments are addressed.
Typically, a seller is responsible for special assessment taxes that are existing or levied but not collected at the time of settlement.
Any exceptions must be agreed upon by buyers and sellers collectively.
12. Are special assessment taxes a lien?
Yes, special assessment taxes are considered to be a lien.
They can be regarded as an involuntary or a voluntary lien.
If a property owner initiates the process, then the special assessment lien would be regarded as voluntary.
If the government undertook the process, then the special assessment lien would be considered involuntary.
13. Can special assessments come from private associations?
Yes, in this blog, we’ve primarily discussed public special assessments that are used in public projects (roads, sidewalks, libraries, schools, etc.).
However, special assessments can also be levied by private associations.
You may see these if you live in a condo, townhouse, or house that has a homeowner’s association.
This fee would be in addition to any homeowner’s fees that are already charged.
There you have it!
Everything you needed to know about special assessment tax.
If you’re becoming a property owner soon, this is one part of ownership that often slips through the cracks.
Keep it on your radar, so you understand how you can stay on top of your payments and maximize those deductions.
For more information on buying, selling, or investing in vacant land, check out our other resources below.
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.