Real Estate Law

Buying a residential new construction home is exciting! A homebuyer of a newly constructed home gets to enjoy the chance to select everything that goes into the home, all the details, appliances, flooring, fixtures, tiles, lighting, etc. It can be overwhelming and exciting in equal measure.

One BIG detail that is often overlooked is the effect that new construction has on property taxes in Pennsylvania.  With very few exceptions, every property has a tax assessment whether the property is exempt from taxes or assessed as vacant land, agricultural, a builder’s lot or fully assessed with land and improvements.  Determining how a property is assessed will aid with figuring out how the total tax assessment will change once a new building or home, the “improvement”, is completed. Just like the Beatles song the Taxman, if you build it, I’ll tax your…. House.

With residential new construction home purchases, it is important to understand that there may be a finished home on the property, however a brand spanking new home means a brand spanking new assessment as well.  In Pennsylvania the “when” of when a new assessment will be issued is all about timing.  Every county in Pennsylvania is unique in its process for assessment of new improvements upon property. Some counties can take over a year to assign a new assessment while other counties reassess almost immediately and send out a Notice of Assessment within a month or two of purchase. The timing of a new assessment can depend on the time of year, staffing in the assessment office, processing of subdivisions, newness of a particular subdivision and a variety of other reasons. This is why it is important to have a researched estimate for the total property taxes on new construction property so that a buyer can be prepared for the who, what, when and why of the total tax liability to come. 

Because builders can move from breaking ground to a finished home ready to sell within a matter of months and because Pennsylvania counties and municipalities generally collect property taxes at the beginning of a tax year, if you build, or purchase new a new build, in a particular year the taxing authorities will need to catch up on the improvements made and assessed for that year. Therefore, if you purchase new construction property that is taxed at a vacant land value at the beginning of the year of purchase, you are likely to have interim taxes assessed on the building value for the balance of the tax year, which will typically be retroactive to the month following the issuance of an occupancy permit (this is usually the month following a closing). For example, if you close on a new home in August, the interim tax invoices you receive a few months after closing will likely show interim taxes for 4 months of County and Township taxes (September to December) and for 10 months (September to June) for interim school taxes on the fiscal tax year that runs from July 1st to June 30th (if applicable in your county). Remember, these taxes are almost never part of your closing costs and will come directly to you as the new homeowner after closing.

To break this down, I researched my own backyard, so to speak, and a new construction property in my own Township in Washington County that sells for $250,000.00 has an average assessment of about 75.21% of the purchase price, or $188,025.00 which based on the current 2023 millage rates for my particular location, for an August closing would result in the following interim tax breakdown for County, Township and School District:

Keep in mind, that although you may buy your home with a purchase money mortgage from a lender, that lender is not going to escrow your interim taxes for you and you will need to dig into your own pocket as the new homeowner to pay the taxes months after the closing occurs. Regardless of any notes the local or county tax collector may include in your interim tax invoices, you should communicate directly with your lender and get a copy of your escrow statement before assuming your lender will pay your tax invoices.

Researching an accurate new property tax assessment estimate is a lot more involved than just finding the close comparables on the county websites.  If you plan to go by the “1.5% rule” that some real estate professionals have leaned on for years, you could get yourself into trouble and be very surprised by your actual assessment.   This is especially true in a new subdivision where the new construction comparables have not been established.  There are many factors that should be taken into consideration when researching for an accurate new assessment. Below is just some of the information that should be researched:  

• The Current Common Level Ratio Factor (CLR) which is the real estate valuation factor based on data compiled by the State Tax Equalization Board, adjusted once a year and released in July of every year.
• Annual millage rate adjustments for County, Township and School.
• Trends of new construction assessments that are specific to the Township or Borough.
• Year of the last county-wide assessment and/or the status of a new county-wide assessment.
• Discussions with the county tax assessment office and local tax collector.

No one wants to be surprised by property taxes or the consequences of new improvement assessments they are not prepared for. Below is a summary of events to watch for in your 1st year of new construction:

Data collection:  You may see a data collector visit your new home (tape measure in hand). This person is typically someone that works for or with the County Assessment Office and compiles the information necessary to place an assessment on your improvement.

Notice of Assessment:  This is the official notice from the County Assessment Office that will provide the new assessed value for the improvement for the current or subsequent tax year. You are on the clock when you receive this notice from the County Assessment Office.  Depending on the county, you will have as little as 30 days to appeal a brand-new assessment that is too high. If you miss this window to appeal the new assessment, you will need to wait for the yearly general appeal period to plead your case with the Board of Assessments and may not receive any benefit to a successful appeal until the following tax year. Note: Even if you feel your taxes are too high, you are still responsible for paying property taxes on time.

Interim Tax Invoices: These invoices will come on the county’s time frame (usually at the most inconvenient time). This invoice is for the assessment on the improvements for balance of months in the tax year of new construction. Tip: Set a calendar appointment for yourself to check the status of your property assessment online every few months after closing for the 1st year. If you see that you have new assessment but have not received a Notice of Assessment or interim taxes, it’s time to dig in and investigate your paperwork.

Mortgage Escrow Accounts: If you have a mortgage and have agreed to escrow your taxes with your lender, make sure you know what the lender collected upfront as a prepaid item at closing and get a copy of your escrow statement after 6 months and 1 year after your closing, chances are it will look wildly different than your Initial Escrow Account Disclosure that you signed at closing and you will need to figure out what was paid and to whom. Tip: If you received a large refund from your escrow account in that 1st year DON’T SPEND IT without researching your assessment, you probably owe it to one or more taxing authorities. Also, speak to your lender to make sure your escrow account is funded correctly. If your mortgage escrow payment in your monthly loan payment is reduced significantly, the lender probably adjusted the monthly escrow payments based on the delay of the new assessments and reverted back to the lower taxable land only assessment. You need to watch this closely and make it a point to communicate with your lender regarding any refunds and/or adjustments. 

Whether you are trying to estimate taxes for new construction or an existing home that has sold for a significantly higher amount than the existing county assessment and could be ripe for an appeal by the local school district, you should know that Bowles Rice maintains an experienced Real Estate practice group that routinely handles new construction or new assessment transactions to give you the best estimate and up-to-date information so you can be properly prepared for the tax liability to come. Feel free to also contact me for more information.