Introduction
When buying or selling a property, one important aspect to consider is how to prorate real estate taxes at closing. Prorating real estate taxes ensures that both the buyer and seller are responsible for their fair share of property taxes based on the time they owned the property during the tax year. This article will guide you through the process of prorating real estate taxes at closing, providing a clear understanding of the steps involved.
Understanding Real Estate Taxes
Before diving into the proration process, it’s essential to have a basic understanding of real estate taxes. Real estate taxes, also known as property taxes, are levied by local governments to fund various public services such as schools, infrastructure, and emergency services. The amount of property taxes owed is typically based on the assessed value of the property and the tax rate set by the local government.
Prorating Real Estate Taxes
Prorating real estate taxes involves dividing the annual tax bill between the buyer and seller based on the closing date. The buyer assumes responsibility for the property taxes from the closing date until the end of the tax year, while the seller is responsible for the taxes from the beginning of the tax year until the closing date.
To calculate the prorated taxes, follow these steps:
Step 1: Determine the annual tax amount: Obtain the current annual property tax bill for the property. This information can usually be obtained from the local tax assessor’s office or the seller’s real estate agent.
Step 2: Determine the number of days each party is responsible for: Calculate the number of days the seller owned the property during the tax year and the number of days the buyer will own the property from the closing date until the end of the tax year.
Step 3: Calculate the prorated taxes: Divide the annual tax amount by the total number of days in the tax year to determine the daily tax rate. Multiply the daily tax rate by the number of days each party is responsible for to calculate their respective prorated tax amounts.
Escrow Accounts
In some cases, prorated taxes are handled through an escrow account. An escrow account is a separate account held by a third party, typically the closing agent or the mortgage lender, to manage funds for property-related expenses such as taxes and insurance.
When an escrow account is used, the buyer may be required to contribute a portion of the estimated annual property taxes to the account at closing. The funds in the escrow account are then used to pay the property taxes when they become due. This ensures that the taxes are paid on time and eliminates the need for the buyer to make a lump sum payment.
Conclusion
Prorating real estate taxes at closing is an important step in the property buying or selling process. By accurately dividing the tax responsibility between the buyer and seller based on the closing date, both parties can ensure a fair distribution of the financial obligation. Understanding the steps involved in prorating real estate taxes can help facilitate a smooth closing process and avoid any potential disputes.
References
– National Association of Realtors: realtor.com
– Internal Revenue Service: irs.gov
– Investopedia: investopedia.com
