Does the Title Company Pay Property Taxes at Closing?
Understand the title company's role in ensuring property taxes are paid at closing. See how costs are allocated and disbursed for a clear property transfer.
When purchasing a home, the title company facilitates the payment of property taxes at closing. It acts as a neutral third party, ensuring that any outstanding tax liens on the property are settled before ownership is officially transferred. The title company does not pay these taxes with its own funds; instead, it uses the money exchanged between the buyer and seller during the transaction. The company’s role is to manage the collection and distribution of these funds to the correct government taxing authorities.
The Role of Property Tax Proration at Closing
Property tax proration is the standard method for dividing the annual property tax bill between the home’s seller and buyer. The calculation ensures that each party pays taxes only for the number of days they owned the property within the tax year. This division is based on the closing date, which marks the official transfer of ownership.
The specific proration process depends on when property taxes are paid in the local jurisdiction. In many areas, taxes are paid in arrears, meaning the tax bill that arrives is for the previous year. For example, the 2024 tax bill covers the period the seller owned the home in 2023. In this scenario, the seller gives the buyer a credit at closing for their portion of the unpaid taxes. The buyer then uses these credited funds, in addition to their own, to pay the full tax bill when it becomes due.
Conversely, some jurisdictions require property taxes to be paid in advance. If a seller has already paid the full property tax bill for the upcoming year, the situation is reversed. The buyer will provide a credit to the seller at closing, reimbursing them for the portion of the year the buyer will own the home. For instance, if closing occurs on July 1st and the seller has paid taxes for the entire calendar year, the buyer will reimburse the seller for the remaining six months of the year.
The title company is responsible for accurately calculating these prorations based on the annual tax amount and the closing date. They often use the previous year’s tax bill as a basis for this calculation if the current year’s official tax figures have not yet been released by the local taxing authority.
Understanding Taxes on the Closing Disclosure
The Closing Disclosure (CD) is a five-page standardized form that details the final terms and costs of a mortgage loan. The CD clearly itemizes how property taxes are handled between the buyer and seller, reflecting the proration calculations performed by the title or escrow company.
On page two of the Closing Disclosure, under the “Other Costs” section, you will find line items related to property taxes. This area shows charges and credits to both the buyer and seller. A “debit” is an amount that is owed, while a “credit” is an amount that is received.
This section also details the initial deposit the buyer must make into their new mortgage escrow account. The CD will specify the amount needed to fund this account at closing, which includes a few months of property tax payments to build a cushion.
The Title Company’s Payment and Disbursement Process
The title company’s primary function at this stage is to manage the disbursement of all funds involved in the transaction. This includes collecting the buyer’s required cash-to-close and using the seller’s proceeds to pay off any existing liens or obligations on the property.
A part of this process is settling the property tax bill. The title company ensures that any delinquent taxes are paid in full and that the prorated amounts are correctly allocated. Using the funds collected at closing, the title company will issue a direct payment to the appropriate county or municipal taxing authority.
The timing of this payment depends on when the closing occurs in relation to the tax due dates. If a tax bill is currently due, the title company will pay it immediately as part of the closing process.
Post-Closing Property Tax Obligations
Once the closing is complete, the responsibility for paying property taxes transfers entirely to the new homeowner. For the buyer, the method of payment going forward is determined by the terms of their mortgage loan.
The most common arrangement is paying property taxes through a mortgage escrow account managed by the lender. With this setup, the lender adds a portion of the estimated annual property tax to the borrower’s monthly mortgage payment. The lender collects these funds in an escrow account and uses them to pay the tax bills directly to the municipality on the homeowner’s behalf. Lenders are required to perform an annual analysis of the escrow account to adjust for any changes in tax rates or property assessments.
Some buyers may not have an escrow account, particularly if they made a large down payment of 20% or more. In this case, the homeowner is directly responsible for saving for and paying the property tax bills on time. Failure to pay property taxes can result in significant penalties, interest charges, and the possibility of the local government placing a tax lien on the property, which could ultimately lead to foreclosure.