Does Escrow Pay a Supplemental Tax Bill?

Property ownership involves various financial responsibilities, including regular property tax payments. While annual property tax bills are a familiar part of homeownership, additional assessments can sometimes arise.

Understanding Supplemental Property Tax Bills

Supplemental property tax bills represent additional taxes due to an increase in a property’s assessed value. These bills are typically triggered by specific events such as a change in ownership or the completion of new construction or significant improvements. A reassessment often results in a higher valuation than the previous assessment.

The supplemental tax bill covers the difference between the old and new assessed values. This amount is prorated for the period between the date of the change (e.g., closing date or construction completion) and the end of the current fiscal tax year, typically June 30. For instance, if a property’s value increases by $100,000 and the tax rate is 1.25%, the supplemental tax would be $1,250, prorated for the months remaining in the fiscal year. Homeowners may receive one or even two supplemental bills, especially if the change occurs between January and May, as it can affect two different fiscal years. These bills can arrive weeks or months after the triggering event, sometimes within three to six months after a purchase.

How Escrow Accounts Manage Property Taxes

Escrow accounts serve as a financial tool established by mortgage lenders to manage certain recurring property-related expenses on behalf of the homeowner. When a homeowner has an escrow account, a portion of their monthly mortgage payment is allocated and held in this account. These funds are specifically designated to cover costs such as annual property taxes and homeowners insurance premiums.

The lender uses the accumulated funds in the escrow account to pay regular property tax bills when they become due. This system offers convenience by consolidating large, infrequent payments into smaller, monthly contributions, simplifying budgeting. An annual escrow analysis is typically performed by the lender to review account activity, project future expenses, and adjust monthly payments as needed.

Escrow and Supplemental Tax Payments

While escrow accounts effectively manage regular, anticipated property tax payments, they typically do not automatically cover unanticipated supplemental tax bills. This is because supplemental tax bills are often generated outside the standard annual tax cycle for which the escrow account was initially funded and are frequently sent directly to the homeowner, not the mortgage lender. The escrow account’s balance is calculated based on the estimated annual property taxes, not on unexpected re-assessments.

Upon receiving a supplemental tax bill, homeowners should contact their mortgage servicer immediately to inquire if their specific escrow agreement allows for or can accommodate such a payment. Even if the servicer can process the payment, the homeowner may need to deposit additional funds into the escrow account to cover the shortfall created by this unexpected bill. The servicer might also adjust future monthly mortgage payments upward to replenish the account and account for the new tax liability.

If the mortgage servicer confirms the escrow account cannot or will not pay the supplemental bill, the homeowner is directly responsible for paying it by its due date. Pay close attention to the due dates, as they can differ from regular property tax due dates. Failure to pay supplemental tax bills by their due dates can result in penalties, such as a percentage of the unpaid amount and monthly interest charges. Prolonged non-payment can lead to the property becoming tax defaulted and eventually subject to a tax sale.