Along with the joys of owning a new home comes the less than pleasant task of paying property taxes - and this starts the day you take possession. On that day, it is very likely that you will either owe the seller money for the property taxes he or she has already paid OR the seller may owe you a refund.
The seller is responsible for all of the taxes up to the day before closing. The buyer is responsible for all the taxes from (and including) the closing date to the end of the year. If the seller has paid a whole year's taxes in advance, then you will likely owe the seller money.
The amount owing is calculated by first figuring out the daily rate of taxation, which is the annual taxes on a property divided by 365 days. For example, if a home's annual property taxes total $3,000, then the daily rate is $8.22 ($3,000 divided by 365 = $8.22). Who owes money is then calculated as follows:
Scenario 1 - You owe the seller
If the seller paid the whole year in advance, then it is likely you will owe the seller money. If for example, the closing date is Sept. 15, the amount you owe will be the daily rate of taxation ($8.22) X 108 days (the number of days left in the year including and after the closing date). The total you owe will then be $887.77.
Scenario 2 - The seller owes you
If the seller has not paid any of the property taxes for that year, then the seller will likely owe you money for his or her share of the taxes. If, for example, you take possession on March 15, then the seller's share will be the daily rate of taxation ($8.22) X 73 days (the number of days in the year up to, but not including, the closing date). The total the seller owes you will then be $600.06.
Whether it's the seller or the buyer who must pay, the amount owing is called the "property tax adjustment." It is generally calculated by the seller's lawyer and provided to my office a few days prior to closing. If you owe money to the seller, it will be added to your closing costs, which, as I've mentioned in past e-mails, you will be asked to provide to my office in the form of a bank draft prior to the closing date.
How much tax could you end up owing?
Typically the maximum amount you would owe on closing is under $1000.00
To take care of your property tax going forward, I recommend that you choose one of the following options:
- having the lender collect the property taxes automatically from you along with your mortgage payments and pay the taxes on your behalf to the municipality
- arranging with your bank to have tax installments deducted monthly from your bank account directly to the municipality. For information on how to enroll in an automatic monthly payment plan in your area, click here.
If you have questions or concerns about this or any other issue related to your home purchase, please contact my office by e-mail: firstname.lastname@example.org or phone: 519-824-7100.
Mark F. Graham
Mark F. Graham
Barrister, Solicitor, Public Notary
Mark Graham Law Office Professional Corporation