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Rules of Thumb for Property-Tax Caps
Indiana caps property taxes for taxpayers, at 1 percent of gross assessed value for homesteads, 2 percent for other residential property and farmland, and 3 percent for everything else. The results of this simple system turn out to be pretty complicated, but there are rules of thumb that make things a little easier to understand. First, though, let's take a look at the how the tax caps work.
Homesteads are in the 1-percent category. A homestead is an owner-occupied primary residence. That means rental housing isn't included (it's not owner-occupied). Second homes (they're not primary) and residential swimming pools (they're not residences) aren't included either. All that non-homestead residential property is in the 2-percent tax-cap category, along with farmland. The 3-percent category includes commercial, industrial, and utility land and buildings, and all personal property, which is mostly business equipment.
Consider a homestead assessed at $200,000. It gets a $45,000 standard deduction, so $155,000 remains. A 35-percent supplemental deduction is applied to that remainder. That's $54,250. Most homeowners get the $3,000 mortgage deduction. The net assessment after these deductions is $97,750. That's the taxable assessed value.
The tax cap for this homestead is 1 percent of gross assessed value, or $2,000. Taxable AV is a little less than half of gross AV, so a tax rate a little more than double the 1-percent cap rate puts the tax bill over the cap. A tax rate of $2.05 per $100 assessed value would do it. Tax bills over the cap receive credits, an amount subtracted from the tax bill to bring it down to the cap.
The tax cap for a $100,000 homestead is $1,000. The taxable assessment calculation yields $32,750, a bit less than one-third of gross AV. The homestead would get a credit if the tax rate was $3.06 or more.
Property in the 2-percent and 3-percent categories receives much less in deductions. Statewide, more than 80 percent of all deductions go to homesteads. That means property in the 2-percent category will get tax cap credits if the tax rate is higher than $2. Property in the 3-percent category will be eligible if the tax rate is higher than $3.
A property's total tax rate is the sum of the tax rates of the county, township, school corporation, library, and other special districts, and the tax rate of the city or town, if the property is located in one. Tax-cap credits are a part of the tax bill not paid by taxpayers, so they are revenue not received by local governments. Revenue losses are divided among local governments, based on their shares in the total tax rate. The caps ignore debt-service tax rates in Lake and St. Joseph counties and rates passed by referenda anywhere.
Now for those rules of thumb.
If the tax rate on your property is less than $2 per $100 assessed value, you won't qualify for tax cap credits, unless you own a house assessed at more than $200,000. No rental housing, farmland or business property will qualify. Local governments that operate in places where the tax rate is less than $2 lose little revenue. About 85 percent of these places are outside of cities or towns. That's where most farmland is, so most of it doesn't get tax-cap credits.
If the tax rate on your property is between $2 and $3, you might qualify for tax-cap credits if your house is assessed between $100,000 and $200,000. Your rental housing, second home or farmland will qualify. Since most rental housing is located in cities or towns, where tax rates are higher than $2, rental housing receives the most tax-cap credits statewide.
If the tax rate on your property is above $3, almost all your rental, farmland and business property will qualify for tax cap credits, and your house will qualify if it's assessed at more than $100,000.
Three-quarters of places with cities or towns have tax rates higher than $2. About 97 percent of all tax-cap credits are losses to governments in those places.
Looks like $2 and $3 are the important thresholds. Keep those rates in mind, and it's a little bit easier to understand Indiana's property-tax cap system.