“In this world nothing can be said to be certain, except death and taxes.” Benjamin Franklin.
Property taxes are confusing. When are they due? How are taxes prorated? Why does this settlement statement show a tax proration when I just paid my tax bill?
For most counties and municipalities in Tennessee, property taxes are collected on an annual basis based on the calendar year. However, taxes are not due on 1st of January. Taxes are usually paid in arrears, due on the 1st day of October and delinquent on the 1st day of March. For example, families who paid their property tax on 10/1/2011 paid for the 2011 tax year, not 2012.
The settlement agent will prorate taxes on the HUD-1 using a simple calculation. The annual tax amount is divided by 365 and prorated to the buyer and seller according to the closing date. If a closing takes place before 10/1 in a calendar year, the seller will pay the buyer at closing and if the closing takes place after 10/1, the buyer pays the seller. This way, each party pays their fair share of taxes.
Here’s a simple illustration. The property tax for a parcel of land is $3,650. The settlement agent will divide this number by 365 to determine that the tax is $10 per day. If the closing takes place on 3/30, then the seller will pay the buyer $890 at closing ($10 x 89 days). When the tax bill is released on 10/1, the buyer will pay the full amount because she received the seller’s contribution at closing.
If the closing takes place on 11/1, then the seller will have already paid the tax (or it will be collected at closing and payment sent by the title company); therefore, the buyer will pay the seller $610 at closing for the 61 days they will own the property at the end of the year.
What happens if the property is reassessed after the closing and taxes are higher than the amount prorated upon at closing? That’s a long discussion we’ll have another day.