(MONEY Magazine) – Excited about that new family room? Your kitchen makeover? So is your property tax assessor. For cash-strapped local governments, the $163 billion that Americans spent on remodeling last year offers assessors' offices a welcome opportunity to increase the market value of homes--and, therefore, the property taxes that homeowners pay.

Al Diaz and Cindy Seip discovered this the hard way. They transformed their 1924 Mediterranean-style home in South Florida with an expanded kitchen and two-story master bedroom and bath addition. When they opened their property tax bill, the assessed value of their home had doubled--and so had the year's taxes, from $3,100 to $6,400.

We're all forking over more taxes than we used to. The $285 billion paid in property taxes nationwide last year represented a 9% jump over 2001--the largest increase in 10 years. The hot real estate market has contributed most to that rise. But local tax assessors struggling to close budget gaps in a tough economy are eagerly seeking ways to boost receipts even further, and the boom in home improvement offers easy justification. "They're on the hunt," says Richard Roll, president of the American Homeowners Association, a consumer advocacy group.

Depending on where you live, your home may be reassessed every year or every few years. In communities where reassessments take place infrequently, assessed values probably haven't caught up to current sale prices, meaning that local governments are losing out on tax dollars. In those settings, assessors "are hyperaware of home improvement projects," Roll says. A remodel may provide all the excuse an assessor needs to up your home's value years before the normal revaluation would occur.

Before you call the mayor to complain about a tax grab, wait. This isn't necessarily a bad thing. Property taxes are a function of market values, so when you increase your home's value, it makes sense that your taxes will rise. But that's a cost of home improvement that you need to consider whenever you prepare a remodeling budget.

HOW DO THEY KNOW SO MUCH?

It's no secret why the local tax office knows you're adding that deck: Copies of all issued building permits land on assessors' desks. Depending on the type of project and the procedures of the particular office, the assessor will change your property's value using standard formulas for extra square footage or estimated improvement cost, or he will actually visit your home to check things out.

Bill Donegan, chief property appraiser in the Orlando area, says his department's assessors wouldn't even look twice at a permit to convert a den into a bedroom, but a 20% addition at a large home in the exclusive Isleworth neighborhood? "The guys will go out and look at that," Donegan says.

In parts of Texas, explains former property assessor Martin Mercado, "every building permit generates a field inspection only because when someone says they're changing their air conditioning, it may be code for changing the whole living room."

Rules vary widely, but generally, kitchen and bathroom redos will increase your taxes because they can, in fact, increase home sale prices. On average, homeowners recoup 88% of the cost of a bath remodel and 67% of a new kitchen if the house is sold within a year of the project. Adding square footage--whether building a new bedroom or enclosing an open porch--will definitely tip off assessors to recalculate home values. So will some smaller projects, like adding a fireplace or central air conditioning.

Anything that qualifies as repairs and maintenance--a new ceiling or modernized plumbing, for example--probably won't catch an assessor's eye. A new roof won't necessarily trigger a reappraisal either, unless possibly you're exchanging cheap asphalt shingle for clay or slate. Other projects can be gray areas: Building a swimming pool when all your neighbors already have one probably won't increase your home's assessed value, but a new pool in a neighborhood where pools are scarce may be a property tax plus. Assessors usually try to account for those distinctions, says Mercado, who now helps people appeal their tax assessments.

WHAT TO DO ABOUT IT

First, it never makes sense to do major renovations on your home without the proper building permits. The fines and legal consequences of getting caught are simply not worth the risk; plus, your local building department will help make sure the work is done properly. Nor are we suggesting that you refrain from improving your home simply to avoid property taxes. Long term, the benefits from increased market value will far outweigh the higher tax cost.

But you need to be aware that any significant home improvement project may mean you'll be paying those extra taxes every single year. You can at least avoid being surprised by a fatter tax bill before you tackle remodeling. Here's what you need to do.

Arm yourself with information. Find out from your local building department what types of improvements require permits. Next, ask your local tax assessor about the assessment schedule in your city or neighborhood so you know when your property comes up for routine reconsideration.

Check for special programs that may reduce taxes. In the state of Washington, for instance, homeowners who remodel can have property tax increases waived for three years on improvements worth up to 30% of the value of the structure. In Florida, Diaz and Seip took advantage of county tax breaks for improvements to historic properties, which slice $1,500 off their annual tax bill for 10 years.

Don't put off the assessor. If an assessor visits in person to examine a renovation, you may be tempted to refuse entry to your property in hopes that the assessor won't value what he can't see. Not a good idea, says New York State private appraiser Sean Kiernan. He cites one home that appeared from the outside to have two stories of finished living area; in fact, an unheated porch on part of the first level qualified the house for a lower tax rate. By not allowing access to the home, the property owners ended up with a higher assessed value than they should have had.

Don't be afraid to challenge your assessment later. If next year's tax bill comes and you think the valuation of your property jumped unreasonably, you can appeal. (See the box on page 194 for the how-tos of property tax challenges.) Just keep your cool--and keep things in perspective. Ultimately, say Diaz and Seip, a higher tax bill is a small price to pay for having the home of their dreams. "That's what matters," Diaz says.