Understanding Adjustments and Prorations of Taxes for Closing

Since we are fast approaching the date beyond which real estate taxes become delinquent (after March 31 of every year), now seems an opportune time to attempt to decipher for the parties to real estate transactions how taxes are accounted for on a Settlement Statement. We are encountering increasing numbers of bewildered buyers and sellers that would like to better understand the adjustments and prorations set forth on their Settlement Statements for closing.

Let’s start with the basics and work up to the convoluted formulas for adjusting and prorating taxes and assessments:

Taxes are due and payable on November 1st with discounts for early payments:

  • 4% discount if paid in November
  • 3% discount if paid in December
  • 2% discount if paid in January
  • 1% discount if paid in February
  • The gross amount is due by March 31st

Next, the real estate tax bill is a combined notice of ad valorem taxes and non-ad valorem assessments.

Ad valorem taxes are paid in arrears (at the end of the year), and are based on the Calendar Year from January 1–December 31. Non-ad valorem assessments are not based on value but a unit of measure determined by the levying authority, and are paid in advance. Assessment periods for non-ad valorem assessments vary and may not be based on the Calendar Year but on a Fiscal Year basis – typically October 1–September 30.  Examples of non-ad valorem assessments are stormwater utility, fire and rescue, and solid waste collections.  A list of levying authorities for Sarasota County can be found at http://www.sarasotataxcollector.com/services/tax-services/property-tax/non-ad-valorem. A helpful link for Manatee County is http://www.taxcollector.com/proptax-geninfo.cfm

Here is the tricky part.  Both ad valorem taxes and non-ad valorem assessments are joined together on the same tax bill and are payable at the same time. Consequently, some of your real estate taxes are paid in arrears and some of your real estate taxes are paid in advance.

When the Settlement Agent (the person or firm handling your closing), makes the adjustments and prorations, s/he must account for:

  • Those taxes that are ad valorem, paid on a calendar year basis
  • Those assessments that are non-ad valorem, paid on a calendar year basis
  • Those assessments that are non-ad valorem, paid on a fiscal year basis

Here is an example (assuming a Closing on March 1, 2018 for a property actually selling for $465,000, having a Taxable Value of $325,500, and having gross Total Taxes & Assessments of $4,452.16):

Calendar Year taxes (1/1/17 – 12/31/17)

4,117.75   Ad Valorem Taxes

+ 162.91   Sarasota County Fire Rescue (a Non-Ad Valorem assessment)

4,280.66

–  171.23  4% discount

4,109.43 ÷ 365 x 59 days (1/1/18–3/1/18) = $664.26 (this amount will appear as a credit to Buyer and debit to Seller)

Fiscal Year taxes (10/1/17 – 9/30/18)

134.94   Solid Waste Service District (a Non-Ad Valorem assessment)

+36.56   Stormwater Utility (a Non-Ad Valorem assessment)

171.50

 –  6.86  4 % discount

164.64 ÷ 365 x 214 days (3/1/18-10/1/18) = $96.53 (this amount will appear as a debit to Buyer and a credit to Seller)

If you are not sure of the adjustments and prorations on your closing statement, or would like further explanation or clarification, contact one of the attorneys or closers at Berlin Patten Ebling, or your local real estate attorney for additional guidance.

Article Authored by Mark Hanewich, Esq. mhanewich@berlinpatten.com

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

www.berlinpatten.com 

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