A Note From The Legal Helpdesk: Property Taxes in Alabama
June 5, 2018
On average, Alabama property owners pay around 0.27% of their property’s value per year in real property taxes. In comparison, Hawaii is the only state with a lower average property tax rate than Alabama. This article provides an overview of how Alabama property taxes are determined, relevant dates related to property taxes, information on challenging the dollar amount assessed for property taxes, and some examples of how property taxes might affect a real estate transaction.
How are property taxes determined?
In Alabama, taxes on real property are assessed every October.[i] While it may seem logical for property taxes to be based on a percentage of the property’s appraised value, the actual determination is more complicated. At its most basic equation, real property taxes are determined by multiplying the assessed value of the property by the property’s applicable millage rate.
The millage rate, or “mills,” is a unit equal to one tenth of one cent ($0.001). Because taxes on each property include state, county, school and municipal taxes, where applicable, millage rates vary depending on the location of property. A list of millage rates by county can be found here.
The assessed value is determined by multiplying the property’s appraised value by its corresponding property classification percentage. The appraised value is the value given to all property by each county’s revenue commissioner. Property classifications are set by state statute.[ii] For example, the property classification percentage for single family, owner-occupied residential property is set at 10%.[iii]
So, to determine the taxes on a piece of property, one first determines the assessed value then multiplies the assessed value by the applicable millage rate. Below is an example of the property tax breakdown for an owner-occupied home located in the city of Montgomery valued at $150,000.00.
Appraised value of property: $150,000.00
Property classification: x 0.10
Assessed value: $15,000.00
Applicable millage rate[iv]:
County (inside Montgomery City Limits): 7.5
Total millage rate: 36.5
Assessed value: $15,000.00
Applicable millage rate: x .0365
Unadjusted tax bill: $547.50
Alabamians may be entitled to various exemptions that may lower their property tax bill. One common exemption, known as the homestead exemption, applies to property owners who occupy a single-family residence as their primary residence. Homeowners can apply for homestead exemptions in the county where their home is located. Information on the homestead exemption for each county can be found here. It is important to remind your clients to apply for a homestead exemption after the purchase of a residential home. This exemption may save your clients a substantial amount of money in property taxes, potentially up to 50% of their unadjusted property tax bill.
Below is a breakdown showing the yearly property tax savings for the Montgomery owner-occupied home referenced above. Assuming the homeowner is non-disabled and below the age of 65, he or she would be entitled to a $4,000 exemption from the assessed value for state property taxes and a $2,000 exemption from the assessed value for county property taxes as shown below:
Full assessed value: $15,000
State homestead exemption: -4,000
Assessed value with state exemption: $11,000
State millage rate: x .0065
State property tax with exemption: $71.50 ($97.50 without exemption)
Full assessed value: $15,000
County homestead exemption: -2,000
Assessed value with county exemption: $13,000
County millage rate: x .0075
County property tax with exemption: $97.50 ($112.50 without exemption)
Thus, in the example above, applying for a homestead exemption would save the homeowner $41.00 per year in property taxes. It is important to note that if the homeowner is over the age of 65, blind, or is permanently and totally disabled, he or she may be entitled to a homestead exemption from all state and county property tax as shown in this chart published by the Alabama Department of Revenue. In the example above, being over the age of 65 could potentially save the homeowner $210.00 yearly in property taxes (38% of their unadjusted tax bill).
Can a property owner challenge the amount of property taxes assessed on his property?
Yes. If a property owner disagrees with the amount of property taxes owed, the property owner may file an appeal through a process set by state law. The Alabama Department of Revenue’s website provides an overview of the appeals process which can be reviewed here.
The most common challenge is to the appraised value of the property. In order to appeal the value assigned to a property and therefore contest the amount of property tax assessed, the property owner may file a written protest with the County Board of Equalization in the county in which the property is located. It is important to note this protest must be filed within thirty (30) days after the publication of the valuation of the subject property.[v] Once a protest is filed, a county appraiser will review the valuation of the property and determine whether any change in valuation should be made. If still unsatisfied, a property owner may be given a hearing before the Board of Equalization to present information which the property owner believes justifies a change in the property’s value. If the property owner disagrees with the Board’s ruling, the property owner may file an appeal in the circuit court, followed by the Alabama Supreme Court, within 30 and 42 days respectively of the lower body’s ruling.[vi]
Should the property owner win his appeal, Alabama law provides a mechanism for the state, county, school board, or municipality to issue the appropriate refund to the property owner.[vii] It is important to note that even during an appeal of a property valuation, the property owner is still required to pay the property taxes assessed on his property. If the property owner fails to pay the assessed property taxes, the court must dismiss the appeal.[viii]
What happens if property taxes are not paid?
If property taxes go unpaid, a tax lien may be placed on the property. Additionally, once a tax lien is placed upon the property, the subject property can be sold to the highest bidder at a tax sale or the tax lien can be sold at auction. These sales typically occur each year in May. It should be noted that property owners have three (3) years from the date of the sale to exercise a right of redemption by paying all taxes, interest, fees, and penalties.[ix] Additionally, legislation was recently passed that will change the tax lien auction law as of July 1, 2018. The new law states that if the tax lien is sold at auction, as opposed to the property itself being sold, the holder of the tax lien certificate may bring an action to foreclose the right of redemption and quiet title to the property in the name of the holder of the tax lien. This action must be brought after the three (3) year right of redemption has passed, but not later than ten (10) years after the auction.[x]
Statewide Property Tax Dates to Remember
- October 1—due date for property taxes
- January 1—delinquent date for property taxes
- February—list of properties with delinquent taxes turned over to county probate court
- April—properties with unpaid taxes advertised for sale
- May (usually the first Monday in May)—tax sale for properties with unpaid taxes
Issues to Note:
Unpaid property taxes affect the sale of a home
There are several potential road blocks that may occur when property being sold has unpaid taxes. First, if a tax lien has been placed on the property, a potential buyer cannot obtain clear title to the property until the property taxes are paid. Further, depending on the terms of the purchase contract, a buyer may deem a seller’s failure to pay property taxes as a material breach of the purchase contract for failure to provide clear title to the property.
For tax deduction purposes, the IRS assumes the seller has paid the property taxes up until the date of the sale, and the buyer is responsible for the property taxes from the date of the sale through the remainder of the year unless otherwise stated in the sales contract. Thus, if property taxes are unpaid at the time of the sale, the IRS still assumes the seller has paid the property taxes up until the date of the sale and may allow the seller to claim a tax deduction for the property taxes if not notified that the buyer has paid the property tax for the entire year. The IRS provides guidance on calculating a property tax deduction related to the sale of a home which can be accessed here by scrolling to the section “Reporting Deductions Related to Your Home Sale.”
Estimated taxes at closings
At closing, the seller and buyer are assigned a pro rata share of the real property taxes. The split is based on the amount of time each party owns the house during the fiscal year and the estimated taxes due the following October 1st. Because the taxes are estimated, the actual taxes owed may increase or decrease depending on the appraised value. This may leave the buyer with a higher tax on October 1. Explaining this issue to a buyer/client may allow the client to budget accordingly and save a REALTOR® from a difficult phone call later.
As a REALTOR®, what can you do to help your client if property tax questions arise?
- Know how to access property tax information in the counties where you conduct business.
- Know how to access Alabama state property tax information from the Department of Revenue.
- Be sure the title insurance company has reviewed and signed off on tax records.
- Remind your client to apply for a homestead exemption after the purchase of a residential home.
- Encourage your client to consult a tax professional and attorney experienced in real estate matters for specific analysis of property tax questions.
[i] It is important to note that state and county property taxes are always assessed in arrears, but municipalities may assess taxes in advance. When the buyer and seller “split” the property taxes at closing, the buyer may need to reimburse the seller for municipal taxes because the seller has already paid them for the entire tax year; while the state and county taxes are reimbursed from the seller to the buyer because the buyer will pay them in full the following October.
[ii] Ala. Code § 40-8-1(a).
[iii] Other property classification percentages are as follows: (1) All agricultural and forest property is assessed at 10%; (2) Historic buildings and sites are assessed at 10%; (3) All property of utilities used in the business of such utilities is assessed at 30%; (4) All property not otherwise classified is assessed at 20%.
[iv] A property owner’s tax bill may show a millage breakdown with more categories than listed below. For example, a county millage rate may include general fund, road and bridge, and fire protection.
[v] Per statute, the assessing official shall give notice of property valuations by publication once a week for two consecutive weeks in a newspaper published in the county. If no newspaper is published in the county, notice shall be posted in three public places in each precinct of the county. No specific date for publication is required. See Ala. Code § 40-3-20.
[vi] See Ala. Code § 40-3-24; see also Ala. Code § 40-3-25.
[vii] See id.
[viii] Ala. Code § 40-3-25.
[ix] See Ala. Code § 40-10-120.
[x] Ala. Code § 40-10-197(a) (effective July 1, 2018).
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