Do Sellers Pay Property Taxes at Closing?

Property taxes are a financial obligation for homeowners, funding local services like schools and public safety. When a property changes ownership, these taxes are adjusted at closing to ensure each party pays only for their period of ownership. This financial adjustment occurs during the closing of the real estate transaction, aiming for a fair division of these ongoing costs.

How Property Taxes Are Prorated

Property tax proration involves dividing the annual tax burden between the seller and the buyer based on their respective periods of ownership within the tax year. This process ensures that neither party overpays or underpays for the time they hold title to the property. The fairness of this division is a fundamental aspect of real estate closings.

The typical method for calculating this division is the per diem rate, which determines a daily tax amount. This daily rate is then multiplied by the number of days each party owned the property during the current tax cycle. For instance, if a sale closes on March 31st, the seller is responsible for taxes from the beginning of the tax year through March 30th, and the buyer assumes responsibility from March 31st onward.

The calculation of property tax proration depends on whether the jurisdiction operates on a calendar year (January 1 to December 31) or a fiscal year. Some jurisdictions, for example, have a fiscal year that runs from July 1 to June 30 of the following year. The general principle remains that the seller covers taxes for their ownership period, and the buyer covers the remainder.

To perform the proration, the annual tax bill for the property is used, or an estimate if the current year’s bill is not yet available. This annual amount is divided by the total number of days in the tax year to arrive at the per diem tax cost. The result is a precise daily amount that accurately reflects the tax liability for each day of ownership.

Property Taxes on the Closing Disclosure

The Closing Disclosure is a standardized document that provides a summary of all financial aspects of a real estate transaction. It details how prorated property taxes are accounted for between the buyer and seller, ensuring transparency.

Prorated property taxes appear on the Closing Disclosure as either a credit or a debit for the buyer and seller. If the seller has already paid property taxes for a period extending beyond the closing date, they will receive a credit for the unused portion, and the buyer will be debited that amount. Conversely, if taxes are due after closing for a period that includes the seller’s ownership, the seller will be debited their portion, and the buyer will receive a credit.

The closing agent, such as a title company or escrow officer, manages these financial exchanges. They calculate the prorated amounts and ensure funds are collected and disbursed. The agent ensures that the seller’s share of taxes is collected from their proceeds and that the buyer receives a credit for that amount, which they will then use to pay the full tax bill when it becomes due.

In jurisdictions where taxes are paid “in arrears,” meaning taxes for a period are paid after that period has ended, the seller provides a credit to the buyer at closing for their share of the unpaid taxes. In contrast, in “paid in advance” jurisdictions, if the seller has prepaid taxes for a period past the closing date, the buyer reimburses the seller for that prepaid portion.

Specific Scenarios for Sellers

Beyond standard proration, several situations can impact how sellers handle property taxes at closing. These scenarios often involve estimates, existing financial arrangements, or special circumstances related to the property itself. Understanding these possibilities helps sellers prepare for the closing process.

Estimated Tax Bills

When the current year’s property tax bill has not yet been issued at the time of closing, the proration is typically based on an estimate. This estimate usually relies on the previous year’s tax amount. If the actual tax bill differs significantly from the estimate, some contracts allow for a post-closing adjustment.

Escrow Accounts

Sellers with an existing mortgage often have an escrow account for property taxes, where funds are collected monthly by their lender to cover future tax payments. At closing, any remaining balance in this escrow account is typically refunded to the seller. If there’s an outstanding balance in the escrow, the seller may need to pay the difference to ensure the taxes are fully resolved.

Special Assessments

Special assessments are additional fees levied by local governments or homeowners’ associations for specific improvements or repairs. These assessments can be a one-time charge or spread out over years. Generally, sellers are responsible for paying any authorized special assessments at closing, even if they were payable in installments.

Delinquent Property Taxes

Delinquent property taxes, which are unpaid taxes from previous periods, must be cleared before or at closing to transfer a clear title to the buyer. Unpaid taxes can result in tax liens on the property, which act as legal claims that must be satisfied. The seller is typically responsible for paying any outstanding delinquent taxes, with the amount often deducted from their sale proceeds.

Purchase Agreement Terms

While proration is standard, the specific terms for handling property taxes can sometimes be negotiated and outlined in the purchase agreement. This contractual agreement can specify how various tax-related costs, including special assessments, are allocated between the buyer and seller.