Property taxes are paid current when a property is sold. Find out how to calculate tax proration at the close of escrow.
Closing costs for the sale of real property will include property tax proration. The purpose of a proration in a sale escrow is to fairly divide property expenses – such as taxes and homeowner’s association dues (HOAs) – between the buyer and seller to ensure each party is only paying for the days which s/he actually owns the property.
THE TAX YEAR
Unlike the calendar year, the tax year begins on July 1 and ends on July 1 the following year. For example, the 2015-2016 tax year runs from July 1 2015 to July 1 2016.
Californians pay their property taxes in two installments. The first installment covers the time period from July 1 through January 1, and the payment is due November 1 (delinquent by December 10). The second installment covers the time period from January 1 through July 1, and the payment is due February 1 (delinquent after April 10).
DEBITING OR CREDITING A TAX PRORATION
To determine whether you will be debited or credited for property taxes at the close of escrow, first check to make sure the property tax payments are current. If the seller has paid the first installment, then property taxes are paid to January 1. If the seller has paid the first and second installment, then the property taxes are paid to July 1.
If the seller’s last tax payment covered a time period beyond the close of escrow, the proration is made from the close of escrow to the date to which the taxes are paid. The proration is a credit to the seller and a charge to the buyer.
Example: Close of escrow is scheduled for April 22, 2016. The seller has already paid the first and second installment, bringing the property taxes current to July 1, 2016. The seller will be credited and the buyer debited from April 22, 2016 to July 1, 2016. This reimburses the seller for the days in which he no longer owns the property.
If escrow closes before the tax due date, the proration is made from the first day of the tax installment to the close of escrow date.
Example: Close of escrow is scheduled for January 15, 2016. The seller has not yet paid the 2nd installment due February 1. The seller will be debited and the buyer credited from January 1, 2016 to January 15, 2016 to reimburse the buyer for the dates that the seller owned the property within that tax period.
CALCULATING A TAX PRORATION
Tax proration is based on a 360-day year, and 30-day months. Refer to the most recent tax bill or county tax records to determine the total property tax due for the fiscal year (tax year).
1. Divide the annual property taxes by 360 – this will give you the property tax proration amount due each day of the fiscal year.
Example: If the property taxes on a particular property are $6,000 per fiscal year, the daily prorated tax rate is $16.67 ($6,000/360).
2. Count the number of full months from the start of the tax period and through to the day before closing. Multiply that number by 30.
Example: If the first property tax installment has been paid, and escrow is scheduled for October 15, there are 3 full months from July 1, which equals 90 days by tax proration guidelines.
3. Count the number of days in the partial month in which closing will occur, but do not include the date of closing.
Example: If escrow is scheduled for October 15, there are 14 partial days.
4. Multiply the total number of days by the daily tax amount.
Example: 90 days (3 full months) + 14 partial days = 104 days.
104 x $16.67 = $1,733.68
This is the amount of property taxes the seller is responsible for to cover the days s/he owned the property.
5. Count the number of full months from the date of closing to July 1. Multiply that number by 30.
Example: If the close of escrow is October 15, there are 8 full months remaining in the fiscal year.
8 x 30 = 240 days
6. Subtract from 30 the number of days the seller will own the home in the closing month.
Example: If the close of escrow is October 15, the seller will own the property for 14 days (October 1 through October 14).
30-14 = 16
7. Add the total number of days the buyer will own the home in the fiscal year and multiply that by the daily tax amount.
Example: 240 + 16 = 256 days
256 x $16.16 = $4,267.52
This is the buyer’s tax proration and will be debited to the buyer at the close of escrow.