Alabama has some of the lowest property taxes in the country. They are so low, in fact, that some newcomers don’t even notice when they pay more than they should. It is not uncommon for a new homebuyer to see their taxes double after the first year because they failed to take a couple of simple steps. That’s bad enough, but an inflated tax bill can make it harder to sell your house down the road. This article may just help you save money on taxes and make a confusing system a little clearer.
The Tax Time Bomb: One difficult aspect of Alabama ad valorem taxes is that they are paid in arrears. Making matters even more confusing, the amount of that bill is determined by the property’s tax status on the prior October 1. So, if you buy a property with a Class III property and a homestead exemption (more on this later) in the spring, you will have the benefit of that low tax bill the next autumn when the bill is issued. But, if you don’t take steps to continue those exemptions and classifications, they will disappear the following year! You will end up paying more than double.
Homestead? Or, is it Really about Classification?
Most Alabamians know that they can “claim homestead” and “cut their taxes in half.” That’s oversimplified if mostly true, but unfortunately, this explanation creates some misconceptions. For instance, most people will (correctly) tell you that you can only have one homestead, but a homestead exemption isn’t what cuts your bill in half. Classification does that. And, you can actually have more than one property with the “half rate” tax bill. To see how this works, you need to know how the tax office determines your tax bill.
First, the tax office determines a value for the property. Let’s call that appraised value. They will send you a postcard to tell you what they decided. But, the tax bill is determined by your property’s assessed value. The assessed value comes from its classification. There are four classes; only two affect homeowners. Class III is owner-occupied residential property, and Class II is everything not otherwise classified. The appliable tax rate (a/k/a millage rate) is applied to these assessed values to determine the tax liability. What you need to know is that single family, owner-occupied (Class III) property is assessed at 10%. A rental property or vacant land (Class II) is assessed at 20%. So, a $400,000 rental house is assessed at $80,000. The same house would be assessed at $40,000 if it were owner-occupied. That is how classification cuts your bill in half. The good news is that you can have more than one owner-occupied property.
Your lake house, your beach house, your hunting lodge, your condo next to the stadium in Auburn or Tuscaloosa. Those could be Class III, provided you do not rent them out. In other words, if these properties are truly “second homes,” they could qualify for 10% assessment. Keep in mind that some tax offices require periodic “renewals” or documentation concerning second homes that they do not require for homesteads/primary residences.
Next Apply Exemptions: You should also know about tax exemptions. These further reduce property taxes beyond the classification. We already touched on the most common exemption, homestead. Claiming homestead will give you additional savings, though the size of the exemption is modest (about $48 in Madison County) compared to the savings from owner-occupied classification.
There are also exemptions for persons over 65 and/or disabled. There are income limits, so inquire with the local tax office about documentation and periodic renewals of these exemptions.
Beware of Variations By County: You may have noticed how we use the term “tax office.” That’s because the taxing authorities are not standard in all Alabama counties. Each of the 67 counties in Alabama has its own taxing authorities, customs, and practices. Some counties (Madison County, for example) have two elected officials, a Tax Assessor and a Tax Collector, who administer the ad valorem taxes. Other counties combine those two roles in one office, known as a Revenue Commissioner. This can be confusing when you’re looking for the correct office, so make sure you go to the right place for the county where the property is located. If you own properties in more than one county, you will be working with multiple offices.
Documentation requirements for your exemptions and classifications also vary by county. For instance, some counties require that you present a drivers’ license showing the property address where you wish to claim homestead. You may also be asked to show your homeowner’s insurance policy to prove that you have a standard homeowners’ policy, as opposed to a policy for a landlord. The most important requirements may be proving income-based exemptions for disabled and older taxpayers. You could be asked for tax returns and other benefits information. Again, it’s best to check the tax office’s website or call ahead.
Not Really the Last Word: As you might expect, there is more to it. Farmland, timberland, and pasture are eligible for even lower taxes based on productivity and soil classification. This is designed to help these industries, which can be “land rich” and “cash poor.” For some taxpayers, it is opportunity to save on property taxes. For others, it is a real pitfall because if a property taxed according to its “present use” as agricultural land is then developed, some of those tax savings are recaptured by a “rollback” tax. Because taxes are paid in arrears, this rollback tax fall on the new owner, who did not have the benefit of the lower taxes. It is simple enough to negotiate the payment in a contract, of course. Just don’t overlook it when dealing with land that was recently developed or that you intend to develop.
Another important point is that the entire tax parcel must be used to qualify for a category. So, if you have a large property with a home and pasture, you could claim a Class III with a homestead exemption. You can save even more if you have two tax parcels: one for the house (Class III with homestead) and one for the pasture (present use, pastureland). Tax offices do have requirements for mapping changes to their assessment maps, so discuss it with the assessor or revenue commissioner first.
If you are looking to learn more about lowering your homeowner taxes our team has the extensive knowledge and expertise to help you decide which path is best for you. We have the resources and people to guide you through the home buying or selling process. Or to learn more about Foundation Title & Escrow Series, LLC. and their services please visit their website.
