“Why do I have to pay more property taxes when I sell my house?? I already paid them this year.” That’s a question that comes up with nearly EVERY property sale. The answer is both simple and complex. The simple answer? The majority of purchase agreements request taxes to be pro-rated to the date of closing (although in 2021’s seller market, this is starting to change). The complex answer requires understanding how Indiana bills property taxes.
So how DOES pro-rating property taxes work??
Most often, buyers will ask sellers to pay pro-rated property taxes to the date of closing. However, there is often confusion when it comes to seeing those line items show up on a closing settlement statement. That’s because Indiana is one of only 2 states that bill preperty taxes in arrears. What? We know, it’s confusing…so let’s start at the beginning…
Indiana’s property tax bills are mailed out in the spring following the calendar year they are billing for. Think of this billing like filing your income taxes. The spring bill is actually for the property taxes due from the previous calendar year (just like income taxes). Homeowners may pay one lump sum in May or split the payment between the May and November due dates. If the homeowners have a mortgage the tax payments are most likely made twice a year from their escrow account with the lender.
When it comes to prorating property taxes for a sale, the title company charged with putting together the closing settlement statement checks with the county to see how much of the current bill has been paid (i.e. was it paid in a lump sum in May? or split?). Depending what they find, there will be a line item with the FULL amount still due from the previous year’s tax cycle.
THEN, the title company counts the number of days in the current calendar year that the seller has ownership of the property and multiply that by the per diem (daily) property tax amount. This number becomes the pro-rated line item. This number is debited from the seller and credited to the buyer.
After closing, the buyer will be the one to receive all tax bills for the property. So, even though the seller owned the property for a portion of the year being billed, the buyer (as the current owner at the time of billing) is the one who must pay.
Peter is selling his property at 1234 State Street for $200,000. The sale will close on September 1, 2019. The property tax bill for 2018 mailed to Peter in the spring of 2019 was for $2,400.
Peter chose to pay only the first half due in May, 2019. On his closing settlement statement, Peter will see a “debit” line item paying the remaining $1,200 directly to the County Treasurer for the November, 2019 bill.
He will ALSO see a debit line item for taxes that will be billed in the spring of 2020 for the 2019 tax year. Peter owned the property for 244 days in 2019 before selling it. At closing, Peter will credit the buyer $1,604.38 for his portion of the the 2019 taxes she will pay when the spring bill arrives.
It will look like this on the ALTA settlement statement: