In Illinois, real estate taxes are paid for the year that just passed. The 2021 property tax bill is covering money owed for 2020. When a property is sold, the seller must pay the potential taxes owed the following year because those taxes will cover the time the seller still owned the property. Here’s how that works.
How Does Tax Proration Work?
The official term for this line item on the real estate settlement paperwork is tax proration. The seller’s portion of the property taxes should cover taxes owed between Jan. 1 until the date of the closing. But since those taxes will be calculated in a year, there are a lot of unknowns, which leads to the tax proration calculations.
- Calculations start with the most recent tax bill, which the seller should provide
- Multiply the amount of the last tax bill by the proration rate (usually between 105% and 110%)
- Divide that amount by the number of days in a year (365)
- Determine the number of days from Jan. 1 to the closing date that the seller will have owned the property
- Multiply the number of days the seller will have owned the property by the amount determined in Step 3, and that would be the amount of the tax proration credited from the seller to the buyer at closing
How a property tax assessment appeal is going to be handled should be discussed at the time of closing, since both the buyer and seller will be responsible for a portion of the closing year’s taxes. Considerations include who is responsible for the appeals process and any costs that are associated with that appeal.
Tenant tax reimbursements are unique to commercial properties that have rented space. Sometimes, commercial tenants are responsible for reimbursing the landlord for all or a portion of the real estate taxes, per the obligations outlined in the lease. Those tenant payment estimations will need to be included in the rent prorations, and the tax proration will need to be adjusted to account for the tenant payments. A review of the leases should be undertaken to determine whether the landlord is obligated to reconcile the tenants’ estimated tax obligations with the actual obligations once the final tax bill is issued. If that tax reconciliation happens after closing, the seller and purchaser will need to address these as part of the closing paperwork.