Does it make sense to defer property tax?

[Rustic23]

Background: In Texas when one reaches 65 two laws kick in. One, for all School property tax is frozen. Two, for some counties, county tax is also frozen. I live in one of those. Three, you can defer your taxes. If one chooses to do this there is an 8% simple interest, NOT COMPOUND, added to your tax bill. When the last to die, either I or DW, the bill comes due 180 days after the last death or if we decide to sell before that time.

We own our home clear, so there is no impediment to doing this. Our tax bill is frozen at $7,000 a year. When I , an the numbers, I come up with owing $257,000 at the end of 20 years. Our house is currently valued at around $350,000. In 20 years at 4% (average inflation rate) the house will be worth about $767,000. If we put the annual payment in an account and use a 4% return I will have about $210,000. As my kids will be able to pay off the house taxes either way, it would seem to make since to defer the tax.

Paying the tax is not a hardship. However, it seems to make since that I would have a greater chance of getting the money out of a savings account than getting it back from the county if I needed the money for some reason.

Now to another question. I know you can not pay and deduct taxes in advance. You can double pay in one year and deduct. However, If I defer for 20 years and then pay the lump sum is it deductible in that year?

 

[LOL!]

Your 4% per year appreciation caught my eye. My house in the same county has not appreciated by that amount in the last 25 years. I don't think your house will either. You will have to put a lot of money into your house in terms of remodeling to even come close to that kind of appreciation. It is even possible that your house becomes worthless like my wife's grandmother's house.

So does that mess up any of your calculations or does it help them out?

 

[Rustic23]

Our home is located on a 1.1 acre lake lot. It has appreciated from $35,000 to $175,000 in the past 10 years. I don't expect this kind of inflation but I also don't think the property will go to 0. Between 3.5% and 4% is a historical inflation rate used by many appraisers. I can remember the Carter years when many appraisers thought the 4% figure was way too low, and of course if you look at the last six to ten years you would think it is too high. However, if the property goes to zero, and there is nothing in the estate, the kids still do not inherit the debt.

I don't see the property's inflation rate as that big of a deal. Likewise, I used a 4% inflation rate for the savings. Based on my past experience this is low.

I have been eligible for this for 7 years, but I have not done it. My thought process in the past couple of months is more about having the money available for LTC or some other emergency.

 

[W2R]

Personally I would not defer the property tax unless you are in a position in which you would need to sell the house to pay it.

You never know what the future might bring, and it might not be a good idea to stack up present bills to pay off later on in the future if you can afford to pay them now. I have seen too many elderly widows and widowers needing a care facility in their later years, and hoping to pay for it with the proceeds from selling the house. Tax deferral would dip into those proceeds when they sold the house, and possibly might make things a little dicey for the surviving spouse.

 

[REWahoo]

Rustic, I have the same property tax option and choose to keep paying. I have an aversion to "running up debt" and see no reason to defer payment when I don't have a financial need to do so. We have LTC policies so that isn't an issue (hopefully).

Bottom line, I see this decision in the same category as whether or not to pay off your mortgage early - mostly personal preference, at least in my opinion.

 

[conversationalphrase]

Interesting, I live in Texas also and was not aware of the deferment option. Although I'm "only" 58, it is something to think about and maybe plan around in the future. Thank you for bringing it up.

I don't know what's best for you, but if you feel you have adequate savings without home equity it seems the only risk is less inheritance for your beneficiaries.

 

[Gumby]

If you wanted a reverse mortgage, would the tax arrearage preclude that?

 

[Rustic23]

Gumby, I believe it would. However, as the taxes would be in the bank, paying off the back taxes would not be a problem. I also think that any type of mortgage would prohibit a deferment.

I am aware of a couple of people that use this exception. One explained it as "Well it just depends on who is going to spend the money, me or my kids" In this case the individual was spending the money, not saving it. His plan was for the taxes to come out of his estate. He said, for him, it was a low interest loan, that he would never have to pay back.