How Are Property Taxes Handled at Closing in Texas?

Property taxes are a recurring annual obligation that require careful adjustment during real estate transactions, particularly in Texas. This ensures fairness between the buyer and seller by allocating financial responsibility based on each party’s period of ownership. Understanding how these taxes are managed at closing helps ensure a smooth transfer of ownership and financial clarity.

Understanding Property Tax Proration

Property tax proration is the process of dividing the annual property tax liability between a seller and a buyer based on their respective periods of ownership during the tax year. This division is necessary because property taxes often cover a full calendar year but are typically paid in arrears, meaning the tax bill for a given year is issued and due in the following year. Without proration, one party might unfairly bear the entire tax burden for a period they did not own the property.

The calculation generally involves determining a daily tax rate for the property. This daily rate is then multiplied by the number of days each party owned the property within the current tax year. For instance, the seller is responsible for taxes from January 1st up to, but not including, the closing date, while the buyer assumes responsibility from the closing date forward.

When the exact tax bill for the current year is not yet available at closing, an estimate is commonly used for proration. This estimate is often based on the previous year’s tax amount or the current market value with prior year rates.

The Closing Process and Tax Payments

During the real estate closing, a title company or escrow agent plays a central role in facilitating the payment and proration of property taxes. This entity is responsible for accurately calculating the prorated amounts based on the agreed-upon closing date and ensuring these figures are correctly reflected on the Closing Disclosure (CD) or Settlement Statement. The Closing Disclosure outlines all financial debits and credits for both the buyer and the seller.

Typically, the seller provides a credit to the buyer for their portion of the property taxes covering the period from January 1st to the closing date. This credit ensures the buyer receives funds to cover the seller’s share of taxes, as the buyer will usually be responsible for paying the full tax bill when it becomes due later in the year. The prorated amount appears as a credit to the buyer and a corresponding debit to the seller on the closing documents.

The actual payment of the property tax bill usually occurs when it is issued by the taxing authority. If the buyer has a mortgage, their lender often collects monthly amounts for taxes into an escrow account and then pays the bill on the buyer’s behalf when due. If the tax bill is already available and due at closing, the title company may collect the full amount from the appropriate parties and disburse it directly to the taxing authority to ensure all outstanding taxes are cleared.

Specific Considerations for Texas Property Taxes

Texas property taxes operate on a specific calendar that influences their handling at closing. Property values are assessed as of January 1st each year. Tax bills are typically mailed to property owners between October and November, and the payment deadline for these taxes is generally January 31st of the following year. This means taxes for a given year, say 2024, are usually due by January 31, 2025.

Homestead exemptions significantly reduce the taxable value of a primary residence, thereby lowering the property tax burden. For instance, a general residence homestead exemption can reduce the taxable value for school taxes by a substantial amount, currently up to $100,000. Buyers are responsible for applying for their own homestead exemption after closing, as exemptions do not automatically transfer from the seller.

When a closing occurs before the current year’s tax assessments are finalized or bills are issued, prorations often rely on estimates. This typically involves using the previous year’s tax amount or the current market value with prior year rates. If the actual tax bill, once issued, differs from the estimated amount used at closing, the buyer and seller may agree to re-prorate and adjust funds post-closing.