Two things in life are certain: death and taxes. The tax part, at least, is also true for every real property transaction. It can be very confusing for both the buyer and seller side, so buckle up because this blog will help simplify a few things for you and your clients!
Real property taxes are collected and billed differently in every state, and even differently per county/city/town within that state. In North Carolina, most of the time you will just have an annual county tax bill that includes your city/town/school/etc. all within that one bill each year. Per the standard North Carolina Offer to Purchase and Contract, ad valorem taxes on real property shall be prorated on a calendar year basis. This agreement dictates how the county tax bill shall be prorated at closing. Depending on the time of year you close, you will see this proration shown several ways.
If you close from the 1st of January to before the county tax bills are released for the year (most counties release them in August), at closing the seller will credit the buyer their portion of the estimated tax bill from the 1st of the year, through the day of closing. This estimate is typically based on last year’s tax bill unless last year’s tax bill cannot be used. There are plenty of examples and scenarios when last year’s tax bill is not used for this proration, but for simplicity’s sake, we’ll focus on your normal run of the mill resale transaction when it is the case. The seller provides the buyer this credit because when the bill does come out later in the year after closing, it’ll be the buyer’s responsibility to pay the bill in full be it themselves, or through their escrow account, if applicable.
If you close after the tax bill is released, but not yet paid with the county, the bill will be paid at closing and be prorated between the buyer and the seller using the calendar year and date of closing for the split. This is even the case if the seller never paid their tax bill themselves, and it was always paid by their lender through their escrow account. No, this does not mean the seller is paying the tax bill twice because that money is being held in escrow to pay the bill already. Once the seller’s mortgage loan is paid off at closing, their mortgage company is required by law to refund them all funds held in escrow within 20 business days, so they get the money back. The tax bill must be paid at closing though if due and payable, because if not, the seller is not providing clear, marketable, and insurable title to the buyer which is a requirement of the sale.
And lastly, if you close after the tax bill is released and already paid for the year by the seller, then the buyer will credit the seller back their portion of the year from the date of closing through December 31st. This is so neither party ever pays more than their fair share of the annual county tax bill.
One last caveat as this is something that between the months of October-December we see happen a lot and causes mass confusion and frustration for sellers. Escrow accounts tend to bulk pay out tax bills for homeowners in the fall. If you’re under contract to sell, and you received notification from your lender that your tax bill has been paid out of escrow, that means that the money has been sent to the county via a check. To account for that payment, we need to see that check clear with the county and them mark the bill as satisfied. Until that happens, we must assume that the tax bill has NOT been paid. This is when sellers get very frustrated because at that point the money is gone from escrow and cannot be refunded to them upon payoff, and they’re seeing the same amount of money deducted from their proceeds on the closing statement to pay the bill as well. Rest assured, the county will NOT cash and keep both tax payments. They will credit the account with the first check they receive for payment and refund the remitter of the second check. This does delay the seller receiving the money back as checks are floating around the USPS and county waiting to be processed and cleared. The seller will either get a refund from their mortgage lender, or back from us if our check is returned. Hopefully it will not take a lot of additional time, but it may. Unfortunately, there is no way around that other than as a seller you can notify your lender of your closing and hope if the tax payment is scheduled to go out while you’re under contract, they hold it back knowing you are selling, and it’ll get paid at settlement. And after this fun tax ted talk, you hopefully can rest easy!