UNDERSTANDING PROPERTY TAXES

One of the most common questions sellers have when selling a home in Jefferson County is in regards to prorated property taxes. Before closing all parties need to understand the proration of property taxes to avoid confusion and possible delays.  When a cash home buyer advertises that they pay all closing costs the seller may expect to leave closing with the full amount of the contract sales price. If property taxes are owed this may not be the case.

In Jefferson County, Alabama we pay our county property taxes in arrears – meaning when we pay property taxes it is actually for the previous 12 months. While this may seem strange, those who buy and sell many properties in the area are accustomed to this practice.

For example, for the year 2021, the taxes will be due on October 1, 2021. They will not be delinquent until December 31, 2021. The property taxes that are due on October 1, 2021 will be for the tax period beginning October 1, 2020, and ending September 30, 2021. Assume that the seller pays the taxes on October 1, 2021, when they are due and then sells the property on November 1, 2021. Normally in this situation the seller will give the buyer a credit at closing for the taxes which are owed from October 1, 2021, until the closing date of November 1, 2021. If the taxes are $1000 per year the attorney would divide $1000 by 365 days to get the daily tax rate ($2.74 per day), then multiply this amount by the number of days that the seller owes. So in this example, the seller would give the buyer a credit of $84.93 at closing (1000/365 x 31 days). If the seller had not paid the taxes on October 1, the attorney would pay off the previous year’s taxes from the closing proceeds and then credit the buyer with the prorated amount of $84.93. The buyer would then be responsible for paying the full year of taxes in October of 2022.

Sometimes this can be frustrating for sellers who do not understand. It can seem like the seller is getting “stuck” with some closing costs. In reality, the seller is only paying the taxes that are owed for the time they owned the property. 

The opposite is true for the tax proration on most municipal taxes. On municipal taxes, the seller is getting a credit from the buyer because the municipal taxes are paid in advance (through the payment to the county).  So even though the seller is giving credit on county taxes they will receive a credit on municipal taxes. Depending on the amounts of the taxes and the time of the year, the seller may get a little bit more than the contract sales price or a little bit less.

It is important for professional homebuyers to disclose this information to sellers and to answer any questions before closing, so there are no surprises!

We are not attorneys or certified public accountants and all of this is for informational purposes only.