18 Jun An Explanation of Property Tax Prorations in Escrow
One of an escrow officer’s simpler jobs is calculating the amount of property tax that is payable by the buyer and the seller on any given real estate transaction. One of the agent’s tougher jobs can be explaining to the buyer why they may get an official property tax adjustment bill months after the sale is done. Let’s wade into the arithmetic and explain the situation.
Property Tax Defined
Every property gets assessed by the county assessment office every year, establishing the amount of tax due on that property. At the time of a sale, it’s a simple matter for the escrow agent to find out the property’s tax for the full year, and apportion the correct amount to the seller for the year to that date, and the right amount to the buyer for the remainder of the year.
Say, for example, the property tax of the year is $1200, and the transaction closes on May 1. The seller pays $400 for the first 4 months, and the buyer pays $800 for the last 8 months. These numbers show up on the closing statements.
Sale Triggers Assessment
The complication arises because a property sale triggers a new assessment. This assessment happens according to the schedule and timetable of the county assessment office; this means it could happen months after the transaction has closed, when the buyer has long since thought the sale over and done with.
When it eventually occurs, the property has a new assessed value – and a new tax burden – retroactive to the date of the sale. It might be more or less than what the buyer paid on the closing statement, but chances are good that it will be different. Therefore, the assessment office will issue an adjustment notice. If it’s a tax increase, the buyer needs to pay more. If it’s a decrease, each county handles the situation differently. Check with the links below for your own area’s procedures.
Escrow Works With The Numbers
The escrow officer’s job with prorating property tax is just to work with the existing numbers. They use the property tax amount provided to them by title at the time of the escrow (the current property tax amount). They take this current tax information and allocate the charges to the parties accordingly.
That’s why, in an appreciating market, a buyer can get an additional tax bill, months after the sale, when they thought it had already been covered. And that is why, in a depreciating market, the potentially reduced taxes on the home cannot be determined and applied at escrow. For specific tax questions related to a particular parcel, further information can be gained by contacting your county’s tax recorders office: