Friday, November 20, 2009

Pro-rated taxes often confusing during closings

Both consumers and real estate agents alike often struggle to understand Ohio's pro-ration of taxes at closing. The latter part of the year is especially troublesome as sellers are often surprised by the amount that shows up on their HUD statement as it can be nearly a full year's tax that they get charged.

So what happens?

First, it's important to understand that Ohio property taxes are paid 6 months to 1 year in arrears. For example, the bills for your taxes from January through June of '09 are actually mailed in December of the current year or January of the following year. When you sell your home, the title company is required to collect the amount of taxes incurred while you still owned the property but are, as yet, unpaid.

Sellers often believe their tax bills are already paid since they are included with a mortgage payment. The thing to remember here is that funds are escrowed to pay future bills. What sellers overlook is that they will be refunded those amounts when the mortgage is paid off. (According to at least one title company, there are a few occasions where the mortgage payoff is reduced by the escrowed funds - but this is rare.)

Buyers, on the other hand, see the tax amount on their side of the closing statement as an "amount paid on their behalf." This is to address the situation where, initially, the buyer will actually receive a tax bill for the period before they lived in the home. In many cases, the buyer will be depositing at least 6 months of taxes with their new lender in an escrow account and won't realize that the initial tax bills paid from escrow were for the earlier period.

It really does balance out on both sides, but those that aren't familiar with this idiosyncrasy of Ohio real estate can sometimes get a little bit of a rude reminder at closing time.

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