It’s April and tax season is on everyone’s mind, including homebuyers and sellers. Property taxes play a significant role in real estate transactions, impacting closing costs, monthly mortgage payments, and overall affordability. Whether you’re purchasing a new home or selling one, understanding how property taxes factor into the closing process can help you avoid surprises and ensure a smooth transaction.
What Are Property Taxes & Why Do They Matter?
Property taxes are levied by local governments to fund essential services like schools, roads, and emergency services. The amount a homeowner pays is based on the assessed value of their property and the local tax rate. Because these taxes are due annually (or in some areas, semi-annually), they need to be properly accounted for at closing to ensure a fair transaction for both buyers and sellers.
How Property Taxes Affect Buyers
For buyers, property taxes are an essential part of the homeownership equation. Here’s how they come into play during closing:
- Prorated Taxes: If the seller has already paid property taxes for the year, the buyer may need to reimburse them for the portion of the year they’ll own the home. Conversely, if taxes are due after closing, the buyer may receive a credit to cover the seller’s portion.
- Escrow Accounts: Many lenders require buyers to set up an escrow account for property taxes. This means that, in addition to monthly mortgage payments, a portion of the estimated taxes is collected each month and held in escrow to ensure taxes are paid on time.
- Long-Term Costs: Higher property taxes can affect affordability. Before making an offer, buyers should review tax rates in the area to understand the full cost of homeownership.
How Property Taxes Affect Sellers
For sellers, property taxes can impact the bottom line at closing:
- Tax Prorations: Sellers must cover their portion of property taxes up to the closing date. If taxes are unpaid, a portion of the proceeds may go toward settling the balance.
- Tax Deductions: Sellers may be able to deduct property taxes paid during the year when filing their tax returns, potentially reducing their tax liability.
Navigating Taxes for a Smooth Closing
A trusted title and escrow company ensures property taxes are properly calculated and accounted for at closing. By working with professionals, buyers and sellers can avoid tax-related surprises and confidently move forward with their transactions.
Understanding property taxes is key to making informed real estate decisions. As tax season rolls in, stay prepared with ROC so your closing process is stress-free!