The real estate tax proration is based on an estimate because we do not know what the real estate taxes will be until they come out the following year. To calculate an estimate in most of the time, we use the most recent ascertainable full year tax bill and multiply it by 105%, because we anticipate that the taxes will go up every year. We then prorate that amount for each day that the seller owned the property and taxes have not yet been paid. This usually works out great, except when properties are reassessed and their values have increased drastically, which is what many homeowners found in their 2017 reassessment.
When the assessed value has of the property has increased from 2016 and 2017, the 105% proration may not provide the buyer with enough funds to pay the bill. For instance, the assessed value may have increased 130% since the prior year. If this happens, we know the real estate taxes are going up more than 105%. However, the actual tax bill may be more than a 130% increase from the year prior, because we do not yet know tax rates and state equalizer for 2017 and 2018.
This is one of the many reasons why you want to have an experienced and trusted real estate attorney represent you during your real estate closing. Your attorney can evaluate the real estate taxes of the property and suggest a better course of action than the 105% proration that will leave you stuck paying more than your fair share. One option is establishing an escrow holdback of a portion of the seller’s proceeds from the sale so that the proration can occur at a later date when the actual tax bill comes out. Another option is choosing a different way to calculate the proration that will take into account the increased assessed value and the possible increases in the tax rate and state equalizer. The difference can be thousands of dollars. Contact Sanuw Law to help you with your real estate closing questions.