Understanding Property Tax Prorations

When a real estate closing takes place, the HUD/Closing Disclosure Form will reflect what the municipality’s  fiscal property tax year is, and how the taxes for the buyer and seller break down, based on the date of closing.

The property taxes for the Seller are usually reflected as a credit on the HUD/Closing Disclosure Form, but when that property tax bill does come out, the Buyer often forgets they received a credit from the Seller months earlier. And then the confusion and panic begins.

The purpose of a proration in a sale escrow is to fairly divide property expenses – such as taxes and association dues – between the Seller and the Buyer, so that each party is paying only for those days which they actually own the property.

The Tax Year

The taxes for most municipalities are based on a fiscal year, not a calendar year. This means that the tax year runs from July 1st to June 30th.

1^ST installment:  Jul 1-Dec 30                             /                 2nd installment:  Jan 1-June 30

If the tax year for a  municipality is divided into 2 installments, the breakdown would happen as follows (using this hypothetical example):

• The 1st installment is the time period between Jul 1 and 12/31. The tax payment is due Nov 1.
• The 2nd installment is the time period between Jan 1 and Jun 30. The tax payment is due Feb 1.

HOW THE TAX PRORATION IS FIGURED

We must first determine the date to which the taxes are paid.

• If the Seller pays/paid the first half, then taxes are paid through 12/31.
• If the Seller pays/paid the second half, then taxes are paid through 6/30.

If the Seller’s last tax payment covered a time period beyond the close of escrow, the proration is made from the close of escrow to the date to which the taxes are paid. The proration is a credit to the Seller, and a charge to the Buyer.

EXAMPLE

If the close of escrow is Nov 22, 2015:

• Seller pays the 1st installment of taxes, which brings the taxes current to 12/31/2015.
• The Seller is credited and the Buyer is debited from Nov 22, 2015 to Dec 31, 2015. this reimburses the Seller for the days within that tax period that he no longer owns the property.

If the escrow closes before the tax due date, the proration is made from the first day of the installment to the close of escrow. the proration is a charge to the Seller and a credit to the Buyer.

TAXES NOT YET ASSESSED

If the municipality has not yet committed the tax rate for the coming year by the time of the property closing date, the title company must base the tax proration on the previous year’s taxes. In the event that taxes go up from the past year, the Buyer is responsible for paying that difference to the city/town.

On the day of the closing, the Buyer is the owner of the property and is from then on out responsible for tax bills that come due on/after that date. In the event a tax bill for that property gets mailed to the Seller, it is highly suggested that they forward that to the new owners. However, it is important for the new owner to be proactive and check with the municipality if they do not receive the next tax bill, as it can take municipalities up to a year to update their records to reflect the new owner’s names.