Are Real Estate Taxes Paid in Arrears?

Real estate taxes are a fundamental aspect of property ownership, serving as a significant source of revenue for local governments. These taxes contribute to funding various public services and infrastructure, such as schools, police and fire departments, and road maintenance. Understanding how real estate taxes are assessed and paid is an important part of managing property finances, whether one is a homeowner or considering a property purchase. The process involves local jurisdictions determining property values and setting tax rates to ensure communities receive the necessary funding for their operations.

Defining Real Estate Taxes Paid in Arrears

In the context of real estate taxes, the term “paid in arrears” means that a payment covers a period of time that has already passed. When real estate taxes are paid in arrears, the tax bill received and subsequently paid is for the preceding tax period, not for the upcoming one.

This method contrasts with paying in advance, where a payment covers a future period. For instance, rent is typically paid in advance, meaning the payment made on the first of the month covers the usage of the property for that entire month. With real estate taxes, the “in arrears” system means that property owners are settling a tax obligation for a period of time during which they have already owned and benefited from the property. An illustration of this is if a property tax bill for 2019 is received in February 2020; paying this bill means the owner is covering the tax liability for the property’s ownership throughout 2019.

Real Estate Tax Assessment and Payment Cycles

Real estate taxes are typically assessed based on the fair market value of a property, as determined by local government assessors. This valuation process often occurs annually or on a multi-year cycle, with an effective date for the assessment. The local tax rate, which is set by governing bodies, is then applied to this assessed value to calculate the tax amount due.

The timing of real estate tax payments varies considerably by jurisdiction, and there is no single universal answer to whether taxes are paid strictly in arrears or in advance across the United States. Some jurisdictions mandate annual or semi-annual payments for a past period. For example, some areas issue tax bills in October for the preceding year, with payments due later in the year or early the following year. Other areas may have tax bills due in installments throughout the year, with payments covering the current tax period or a portion of a future period, which would be considered payments in advance. The specific due dates and the tax period they cover determine whether a payment is in arrears or in advance.

Implications for Property Transactions

The timing of real estate tax payments has important financial implications when a property is bought or sold. During a property transaction, a process known as “proration” is used to fairly divide the current tax bill between the seller and the buyer. Proration ensures that each party pays for the portion of the tax period during which they owned the property. This division occurs regardless of whether the local taxes are paid in arrears or in advance.

The calculation for proration involves determining the daily tax amount and then allocating the tax liability based on the closing date. For example, if a seller has already paid taxes for a period extending beyond the closing date, the buyer will typically credit the seller for the unused portion of those taxes. Conversely, if taxes are due for a period when the seller owned the property but have not yet been paid, the seller will be debited, and the buyer will receive a credit to cover that past tax liability. These credits and debits are applied on the closing statement, adjusting the final amount of money exchanged between the buyer and seller.

Many mortgage lenders require buyers to establish an escrow account, which collects a portion of the estimated annual property taxes with each monthly mortgage payment. These funds are held in the escrow account, and the lender then uses them to pay the property tax bills when they become due.