Property taxes are paid in arrears. You aren’t alone if you don’t know what that term means. “Arrears” pertains to money that should have been paid earlier. It applies to real estate purchases because property taxes made during this year are actually for the previous year.
For homeowners, this is a minor issue. Illinois sends out two property tax bills each year. When you get one, you pay it. Simple. You may not even realize you are paying for the previous year. This issue becomes more complicated when you are buying a home.
For example, imagine buying a house and closing on December 28th. Because you will only own the home for three days that year, the seller owes you 362 days’ worth of property taxes. To add one additional layer of complexity, the taxes won’t get calculated until the following year. Let’s figure out how to resolve this issue.
What Do We Know?
Nobody knows what the taxes will be. Though there are more variables to consider, the tax rate alone may change. That’s enough to alter a tax prediction completely. Odds are, when you buy a home in Chicago (for example), the taxes will be prorated per the information available at the time of the sale.
Essentially, the contract you negotiate with the seller states what percentage will be used to determine the prorated amount. You may agree to accept 115% of the previous year’s bill. Will that amount be exact? Highly unlikely. But if you bought a home in December, it keeps you from maintaining a relationship with the sellers until the following July when the taxes come out.
Another (More Precise) Option
Use an escrow account. You can use the calculation above—and the seller can put money into an escrow account. When the tax bill comes out, the issue is addressed. If the amount you estimated was too low, the money comes out of escrow and goes to the seller. On the other hand, if you overestimate the amount, the seller can recoup that money.
Jayaraman Law
Purchasing real estate may be one of the most significant financial transactions of your life. First-time homebuyers may not understand that money changes hands multiple times during a real estate transaction. There’s earnest money, closing costs, and taxes. Jayaraman Law wants to protect you, your home, and your money during this time. Contact us to schedule a free consultation.