Property owners are obligated to pay city,
county, and/or state ad valorem taxes. Nonpayment of such taxes will
result in a lien on the property. The county tax assessor periodically
determines the value of the property, and taxes are assessed on the appraised
value of the property. Depending on the city, county and/or state in which the
property is situated, there may be exemptions for which the property owner can
apply which reduce the tax bill.
At closing, the seller is responsible
for paying delinquent property taxes for previous years. Taxes for the current
year are prorated between the buyer and seller on the settlement statement.
Generally, the lender requires the closing attorney or settlement agent to
establish an escrow account to pay taxes for
In calculating taxes for closing, the
attorney or settlement agent will base prorations upon the current year's tax
bill. If the tax bill for the current year has not been issued, the proration
of taxes will typically be based upon the previous year's tax bill. The amount
of the charge to one party and the credit to the other is determined by
dividing the annual tax bill by 365 (for the daily amount) and then multiplying
that amount by the number of days before closing (for the seller) and after
closing (for the buyer).
In closings involving new construction,
the current tax bill may be dramatically less than future tax bills are
expected to be. This happens because the most recent tax assessment was likely
based on unimproved property. The tax assessor will eventually reassess the
property and base taxes on the improvements. In such cases, the closing
attorney or settlement agent will use the current lower tax bill for prorations
between the buyer and seller, and the attorney will use an estimated future tax
amount to establish the escrow account.