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 settlement agent to establish an escrow account to pay taxes for future years.
In calculating taxes for closing, 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 settlement agent will use the current lower tax bill for prorations between the buyer and seller, and the closing agent will use an estimated future tax amount to establish the escrow account.