Prepay Property Taxes at Closing?
Property taxes are fees paid to state, county and various local authorities that in turn fund local schools, road upkeep, and water/sewer line maintenance — to name a few municipal services they cover. But these costs can vary based on where you live and when you close. To help first-time home buyers understand how these figures are calculated, we’ve put together this review of the way escrowed property taxes at closing are managed.
In a typical real estate transaction, the buyer and seller both pay property taxes, due at closing. Generally, the seller will pay a prorated amount for the time they’ve lived in the space since the beginning of the new tax year. And likewise, the buyer will pay a prorated amount of property taxes to cover those charges for the rest of that calendar tax year.
Should I prepay property taxes?
Unlike prepaying your mortgage, there aren’t any rules or regulations saying you can’t pay your taxes early. This became clear last year when many high-value homeowners moved to prepay taxes before the new deduction cap went into effect this year. The IRS — nor any state or county property tax boards — didn’t move to prevent any of these homeowners from making prepayments, and it likely saved them thousands upon thousands of dollars once Tax Day rolled around. The main thing you’ll want to consider before pre-paying is your personal financial situation and cash flow.
Neither the Internal Revenue Service nor state property tax boards prevent anyone from paying property taxes early. Early generally means paying a future year’s property tax before the start of the year. For example, you can pay property taxes for 2021 in 2020. However, you cannot deduct property taxes on federal tax returns unless you have received an official assessor’s bill for the tax in the next year. In other words, a taxpayer cannot estimate the 2021 tax payments to take the deduction, but if the 2021 bill has been received in 2020, then the amount paid is deductible to the extent of the tax code.
However, if your total deductions (including property taxes) are below the standard deduction, there is no reason to prepay your property taxes. Additionally, if you are required to have escrows for your taxes and insurance, your Lender will pay the property taxes and you don’t have the option to pre-pay them.
Do you have to prepay taxes at closing?
Your lender will escrow for enough money at closing so that they can pay the full tax that is due. With insurance on a purchase, you not only have to prepay a full year, but you also have to escrow (i.e., pay) anywhere from one to two months’ worth of insurance payments at closing for a cushion.
Before the closing date, paying the tax on the property is the seller’s responsibility; on and after the closing date, it’s the buyer’s responsibility as the new owner. Because state and local property tax requirements vary across the United States, including the tax due dates, a little math is required to determine the prorated amount due from the buyer at closing.
Sellers and buyers don’t have to rely on their mathematical acuity to perform these calculations because their closing attorney, lender or escrow agent does the math for them.
Property taxes typically are prepaid for the full year of ownership. When that ownership changes hands, the buyer reimburses the seller for the portion of the taxes that correspond to the remainder of the year after the property closes – this is the prorated amount. However, this is not a reimbursement that the buyer hands the seller or pays the taxing authority. The lender, closing attorney or escrow agent includes prorated taxes among other line items on the mortgage settlement statement.
Do you pay first year taxes at closing?
Common sense tells us that the seller should pay the taxes from the beginning of the real estate tax year until the date of closing. The buyer should pay the real estate taxes due after closing.
It can be a real challenge to get the actual amount due in property taxes because prorating plays such an important role. With each party taking on a portion of the year’s total, that cost will be split down to the date of closing.
Getting the math right is usually the responsibility of your lender or title company – they’ll get you a “cash due at closing” document that takes all of these numbers into account. Most lenders will provide you an estimate of your closing costs when they send you their initial disclosures. Take a close look at those numbers and be sure you’re financially in a position to make the purchase. And remember your negotiating options, too!
For additional information or to have a conversation regarding prepaying closing costs and if its beneficial for you, call The Cain Mortgage Team at 803 261 9267!
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