Understanding Real Estate Taxes in Pennsylvania

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With April 15th behind us, it’s time to focus on the April 30th deadline. What’s April 30th, you ask? Well, under Pennsylvania law, April 30th is the last day to pay city/township and county real estate taxes to take advantage of an available 2% discount. The regular due date without a discount is June 30th, when the actual amount of real estate taxes are due.

Interestingly, each year many people pay a substantial amount in real estate taxes to local governing authorities and school districts without really understanding the manner in which the taxes are actually calculated. This lack of understanding is primarily due to the fact that many homeowners acquire and maintain their residences with a personal mortgage wherein the annual real estate tax liability and the homeowners’ annual property insurance liability is collected in monthly installments as part of their monthly payments. The amounts of each monthly payment attributable to real estate taxes and insurance collected are held in escrow until payments are due, and then the payments are generally made by the rm servicing the mortgage. In many cases, taxpayers only see amount of real estate taxes paid for the entire year on their mortgage company escrow statements at year end.

Various values and formulas serve as the basis for Pennsylvania real estate law. The most challenging aspect of the manner in which these taxes are assessed is the fact that the base on which the tax rate is applied, i.e., the “assessed value,” rarely equals fair market value (or that value at which the property might appraise and for which it might sell at any given time.) Each county within the Commonwealth uses a ratio known as the “common-level” ratio to assign an assessed value at a base year. Generally, the assessed value equals the fair market value only in that base year. The common level ratio is based upon the average ratio between the assessed value and the fair market value of real estate in any particular county. The common-level ratio for each county is based on actual “arm’s length” sales of real property in each county and is determined and published each year in mid-summer (effective for the following tax year) by the Pennsylvania Tax Equalization Division (formerly the State Tax Equalization Board.)

As an example, the base year in Allegheny County is 2013, and the common-level ratio published in July 2014 for the 2015 tax year is 1.10. The common-level ratio in Westmoreland County for the 2015 tax year (assuming a 1972 base year) is 5.18. The basis on which the annual factor is determined, as noted above, are actual valid and arm’s length sales reported from the counties to the state. In Westmoreland County, the assumption is that the current assessed values of real property are 19.3% of their fair market values. The inverse then is a factor of 5.18.

Using this number to determine the current fair market value (which is being used to calculate your real estate liability) for a property located in Westmoreland County, you simply multiply the assessed value times the common-level ratio. Using $72,500 as an example, the estimated fair market value of that property would be $375,550.

The second part of the real estate liability attendant to any real property would be the application of the tax rate, generally referenced as the “Millage assessment.” In most municipalities, each property owner annually receives property tax bills from three taxing authorities: a county property tax bill (typically mailed in winter), a township/borough tax bill (typically mailed in late winter/early spring), and a school district tax bill (typically mailed in mid-summer). Each of the three taxing authorities will assign an annual tax rate (i.e., a millage rate) that is multiplied by the assessed value to determine the owner’s property tax burden.

Often, the three millage rates will be combined into a total millage rate that is used to calculate the total property tax burden for the year. Millage rates are published on each county government’s website and are typically revised for the following tax year in mid-summer. Occasionally, as is the practice in Westmoreland County, the county and municipal (city/borough/township) taxes are combined into a single billing.

To illustrate how these rates are applied, assume that the property is located in Hempeld Township in Westmoreland County and has a total millage rate for the 2014/15 tax year of 98.61 (20.99 county millage, plus 3.00 Hempeld Township millage, plus 74.62 school district millage). Since the property in the above example has a fair market value of $375,550, the total property tax obligation in 2015 is approximately $7,149 [($375,550/5.18) x 98.61/1000].

The real opportunity to reduce your real estate tax liability is to pay by April30th to enjoy the early pay discount. However, understanding the assessed value of your home can help you to identify whether your home is being taxed at too high a value. In these cases, all counties offer an appeal process enabling real property owners an opportunity to contest the assessment and argue for a lower assessed value.

Should you have questions concerning your real estate tax bill, please contact Bob Grossman at 412-338-9300.