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Real Estate Taxes and their collection, proration, and obligations are one of the more confusing parts of the real estate closing process your clients will face. Here, we will hope to provide you with some fundamental understandings of these three facets, so you can address your client’s questions and help alleviate some pre-closing and post-closing questions and anxiety.
Understanding Tax Prorations
Tax Collection:
Real Estate Taxes are collected by the County Treasurer twice a year in all Ohio counties. The payment due dates vary but are traditionally due in February and July. Real Estate Taxes are billed in a current year, but represent the taxes for the PREVIOUS calendar year. Therefore, the February Tax Bill that comes due in any given year represents the taxes for the PREVIOUS year’s first six months. Likewise, the July Tax bill for any given year represents the PREVIOUS year’s second six months period. Once both half tax bills are paid for the given year, the taxes are paid as current as they can be, even though that means only the PREVIOUS year’s taxes have been paid.
With that general understanding, let’s look at proration of the taxes.
Tax Proration:
With real estate taxes being a year behind in their collection, purchase transactions require the Seller to provide a proration to the Buyer towards future tax bills that will come due after closing, that will be the Buyer’s obligation to pay, but represent a period the seller owned the real estate.
There are two basic proration types used in residential real estate transactions. These two types of proration methods are referred to as LONG proration and SHORT proration. The type of proration used in a transaction is predicated by the Purchase Contract provision regarding real estate taxes.
The local Board Purchase Contract provides these two options and a simple rule to follow is:
If the Closing takes place in the first Six Months of the Year:
SHORT: The Seller pays the FEBRUARY tax bill and pays the Buyer a proration from January 1 of that year to the date of closing. Buyer is responsible for the JULY tax bill and all future bills.
LONG: The Seller pays the FEBRUARY tax bill and pays the Buyer a proration from July 1 of the previous year to the date of closing. Buyer is responsible for the JULY tax bill and all future bills.
If the Closing takes place in the second Six Months of the Year:
SHORT: The Seller pays the FEBRUARY tax bill and pays the JULY tax bill and pays the Buyer a proration from July 1 of that year to the date of closing. Buyer is responsible for the tax bills that will come due the next year and all future bills.
LONG: The Seller pays the FEBRUARY tax bill and pays the JULY tax bill and pays the Buyer a proration from January 1 of that year to the date of closing. Buyer is responsible for the tax bills that will come due the next year and all future bills.
While by no means a fast and hard “rule”, and since the Purchase Contract determines the proration method used, here is a quick guide to the various local counties and their traditional proration methods:
“Short” Counties: Montgomery, Miami, Warren
“Long” Proration Counties: Clark, Champaign, Greene, Shelby, Preble, Butler, Hamilton
Let’s take a look at who is obligated to pay the real estate taxes, before, at, and after closing.
Who is Obligated to Pay the Real Estate Taxes?
It is important to remember that every transaction is its own individual deal. Any deal can be drafted and agreed to by the parties regarding the real estate taxes and the manner in which delinquent taxes, current taxes and future taxes are addressed at the closing and is a function of the parties agreement with one another, but in general:
Taxes which became due before the closing: The Seller is obligated
Taxes which become due at the closing: The Seller is obligated at closing to pay the tax bills that are currently due and payable, therefore as shown above, the Seller pays the FEBRUARY bill if closing in the first half of the year, as well as, the JULY bill, if closing in the second half of the year.
Taxes which become due after the closing: The Buyer is obligated
Talking Points and Reminders:
• You will be asked by your clients after closing, “why am I getting the seller’s tax bill?”
• Remember the Seller’s Escrow Account has a refund coming regarding taxes
• The Buyer might have an escrow account that pays the taxes after closing
• Income tax preparation time remind your clients by sending them a copy of their closing statement that you’re thinking of them and wanted to put a copy in their hands for informational purposes.