More New-Home Buyers
Are Hit With Impact Fees
October 08, 2004 -- Buying a newly built home has gotten a lot more expensive in some parts of the country, but it isn't for the obvious reasons.
A growing number of communities are beginning to impose "impact fees" on home builders to help defray the costs of roads and parks to serve new housing developments. Builders, in turn, pass the fees onto buyers of newly built single-family homes, condominiums and townhomes. The impact fees charged vary widely, from a few hundred dollars in some states to tens of thousands of dollars in others.
"Most new home buyers don't even know about [impact fees]," says Pat A. Vredevoogd, a real-estate agent at AJS Realty Inc. in Grand Rapids, Mich. "It's not something they see or hear about until they begin shopping around."
Severe state-budget crises are partly to blame. Unfunded federal mandates have left many local governments scrounging for additional revenue streams, and housing developments are an easy target, says Keyvan Izadi, a land-use planner with the National Association of Home Builders in Washington, D.C. Smaller "exurb" communities also are under pressure from explosive growth, as more families are priced out of homes in the suburbs, and retirees flock to popular retirement destinations like Florida and Arizona.
"Impact fees can provide a quick Band-Aid fix to meet long-term budgetary shortfalls," he says. "And a lot of communities are finally taking notice."
Because a few thousand dollars may be all it takes to price a home buyer out of a hot housing market, impact fees could end up being a deal-breaker. This week, I look at how these stealth taxes work, and what home buyers should know before they start shopping.
How It Works
Local governments that impose impact fees require home builders or developers to pay a one-time levy, usually based on the number or size of lots or units in each new development.
Some 27 states (see map below) currently have laws that enable their local governments to charge impact fees, and five other states allow communities to impose impact fees without statewide legislation. Pennsylvania is among the states considering the fees.
California has some of the highest impact fees in the nation, in part due to the high costs relating to water and waste-water projects. In some counties, new home buyers can pay up to $50,000 or more in impact fees, says Ms. Vredevoogd.
Cabarrus County officials in North Carolina last month quadrupled its existing per-lot impact fee to $4,034, while New Smyrna Beach, Fla., just boosted its existing impact fee to $1,508 from $354. Newly imposed impact fees will tack on an additional $1,000 to the cost of a new home in Dublin, Ga., and homeowners in Tucson, Ariz., now can expect to pay up to $8,400 on new, single-family homes.
"The main impetus was to try to more directly connect the city's new infrastructure costs on new developments directly with that development, and not burden existing home owners," says James R. Keene Jr., city manager of Tucson.
If you're in the market for a newly built home in any of the states highlighted on the map below, here are some factors to consider.
Separate the impact fee from the home price. When shopping around for a newly built home, be sure to ask about impact fees upfront, and request a breakdown of all fixed costs associated with the purchase before you begin to negotiate price.
"Builders will sometimes disclose the fee in their brochures, but they don't usually to go out of their way to advertise it," says Anthony Hsieh, chief executive of HomeLoanCenter.com, an online mortgage lender in Irvine, Calif. "It's always a good idea to ask."
Some other good questions to ask: How much is the impact fee, and how is it levied (by the size of the lot, the home's square footage, or the number of units in the building, etc.)? What is the fee being used to pay for? Is it a one-time fee or an ongoing assessment?
Don't roll the fee into the mortgage. To avoid being double-taxed by paying finance charges on top of the impact fee, pay the fee upfront in cash instead of rolling the cost into your mortgage, says Mr. Izadi of the National Association of Home Builders.
Say, for example, you have a three-bedroom home, and the local community is assessing a $1,000 impact fee. If you include the impact fee in the home price, "now that $1,000 is rolled into a 30-year mortgage, and it's compounded over the life of a loan," he says.
Unfortunately, you won't get any tax benefit from paying the costs upfront. While home buyers may view impact fees as a kind of property tax, the Internal Revenue Service doesn't look at them that way. Since towns charge builders the fees, and doesn't bill the taxpayer directly, the IRS considers the fees "special assessments."
The tax code "makes it fairly clear that these fees are not deductible for income-tax purposes for individual home buyers," says Tim Harms, a spokesman for the IRS.
Expand your search area. If a home you're thinking about buying is located in a community that assesses impact fees, consider expanding your search to nearby towns. While some states give their local governments permission to impose impact fees, many communities within these states choose not to impose them. Depending on where your new home is being constructed, the savings could be considerable.
For example, home buyers shopping for newly built, single-family homes in Prince George's County, Md., will pay an average of $15,054 in impact fees, compared with just $5,322 in neighboring Montgomery County, according to a 2003 national impact-fee survey conducted by Duncan Associates in Austin, Texas.
When to move on. If you or your spouse is in a profession that requires you to move frequently, or you're probably not going to keep your home for more than a few years, it may be a better idea to avoid new housing developments that are likely to be subject to an impact fee.
"Most people think of the fee as a one-time assessment, but people who move frequently and choose to live in newly built homes may find themselves paying the fees more than once," says Ellen Roche, vice president of research at the National Association of Realtors, Washington in D.C. If the town you're home shopping in levies a fee on new developments, "look only at existing homes, or in other areas where they have no impact fees."
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