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The Money Management Newsletter: Home Ownership
Don't let the thrill of buying your new home be dampened by not considering the property taxes
Property taxes are one of the major ongoing costs to consider when purchasing any new home. It's a good idea to start off on the right track by deciding which method of payment is right for you and your budget.



Buying a resale home

When buying a home, you have the option of paying your property taxes through the municipality or having your financial institution pay taxes on your behalf. The bank would collect funds from each mortgage payment, save them in a property tax account and pay the municipality on your behalf each quarter or half a year depending on the region. To ensure there are enough funds in the tax account to cover the first tax bill, most financial institutions can do a tax hold-back. This means that the financial institution would estimate the amount of the first bill and subtract the amount that would be collected in the tax account between the closing of the mortgage and the tax bill due date. The shortfall is what is held back from the mortgage advance and deposited into the tax account. If the previous owner of the home had paid the taxes in advance of the due date, then expect that amount as a payable on closing. Condominiums residence maintenance fees could form part of the closing costs.

Buying a new construction home

For newly constructed homes, the property taxes may have not yet been assessed for the area even though the homes have been completed. If they have yet to be set, you will only be paying taxes on the value of the land. The municipal assessment can take up to 3 years therefore; you will owe this new amount based on the land value and the home value. You will also be responsible for the difference between the land value and the house value since the date you took possession of the home. The following is an example:

Value of Land = $100,000

Taxes on this is $800

Three years go by and the assessment is performed

Value of House and Land = $300,000

Tax assessment says taxes should be $2,400

Your payments will look like this:

Year Payment Actual Amount
Owing
Shortfall
1 $800 $2,400 $1,600
2 $800 $2,400 $1,600
3 Not paid yet --- $2,400
Amount owed $5,600

You will now owe the municipality $5,600 to cover the current year's taxes and the previous two years where taxes were only paid based on the land value.

It's a good idea to find out what the property taxes are in the area by contacting the municipality. This way you can budget the right amount of money as soon as you move in!

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