When buying or selling a property, one crucial consideration is the payment of property taxes. Property taxes fund local government services and infrastructure, and understanding who is responsible for paying them at the time of closing is essential for both buyers and sellers. We will explore the intricacies of property tax payments during the closing process and shed light on the parties responsible for settling the tax bill.
Proration of Property Taxes:
In real estate transactions, property taxes are often prorated between the buyer and the seller based on the closing date. Proration ensures that each party pays their share of the property taxes for the time they owned the property during the tax year. This proration is typically based on the number of days each party owned the property within that year.
In most cases, the seller is responsible for paying property taxes up until the closing date. The seller is expected to clear any outstanding property tax bills and ensure that taxes are paid up to the date of transfer of ownership. This includes both the current year's taxes and any outstanding amounts from previous years.
Escrow Account and Closing Costs:
In some instances, property taxes may be held in an escrow account, which is managed by the lender. The lender collects a portion of the anticipated property taxes from the borrower as part of the monthly mortgage payment. These funds are then used to pay the property tax bill when due. During the closing process, the seller may receive a credit for the funds held in the escrow account to cover the prorated taxes.
Prorated Tax Calculation:
The proration of property taxes is calculated based on the tax rate and assessed value of the property. To determine the prorated amount, the total annual property tax bill is divided by 365 days to determine the daily tax rate. The seller is responsible for paying the taxes up to the closing date, and the buyer will assume responsibility from that point forward.
A settlement statement, such as the Closing Disclosure or HUD-1 form, outlines the financial details of the real estate transaction, including the proration of property taxes. This statement itemizes the credits and debits related to the property taxes, clearly indicating the amounts owed and paid by each party. It is important for buyers and sellers to review this document carefully to ensure accuracy.
Prepaid Property Taxes:
In some cases, sellers may have prepaid property taxes beyond the closing date. These prepaid taxes represent an amount paid in advance for the upcoming tax period. Sellers are entitled to receive a credit for the prepaid taxes, reducing their financial obligation at closing. The buyer, in turn, will be responsible for reimbursing the seller for the prorated portion of the prepaid taxes.
Tax Proration Agreement:
To avoid any misunderstandings or disputes, it is common practice for buyers and sellers to enter into a tax proration agreement. This agreement clearly outlines the proration calculation method, the tax year covered, and the responsibilities of each party regarding property tax payments. Having a written agreement in place provides clarity and ensures both parties are on the same page.
Closing Agent's Role:
The closing agent, such as an attorney or escrow officer, plays a crucial role in facilitating the property tax payment process. They gather the necessary information, calculate the prorated taxes, and ensure that the appropriate credits and debits are reflected on the settlement statement. The closing agent coordinates with the relevant parties to ensure a smooth transfer of ownership and proper payment of property taxes.