If you’re moving to a new home, here’s what you should know about property taxes and what steps you need to take.
Who pays property taxes — the buyer or seller?
Since property taxes are for the entire year, many people wonder if the buyer or seller is responsible for paying property taxes or reimbursing the other party.
Whoever owns the property when the tax is due has to pay the tax to the tax collector. Buyers and sellers negotiate how to split that tax in the purchase agreement.
States usually use one of two timelines for paying property taxes:
- Paid in advance: At the end of 2023, you pay your property taxes for 2024.
- Paid in arrears: At the end of 2023, you pay your property taxes for 2023.
If you’re buying in a paid-in-advance state, the seller will often want the buyer to pay back the seller for part of the tax the seller already paid. For example, if you close at the end of March, the seller only used the property for 25% of the year and will want the buyer to pay 75% of the property taxes.
If you’re buying in a paid-in-arrears state, the buyer will often want the seller to pay the buyer for the part of the tax the buyer will have to pay for when the seller was living there. For example, if you closed in March, the buyer has to pay 100% of the tax but will want to get 25% of the tax from the seller since the seller lived there 25% of the year.
Paid-in-arrears states can get tricky since property tax bills usually don’t come out until the fall. That’s potentially after you closed on the sale.
There are three common ways to deal with this:
- Keep money in escrow until the property tax bill arrives and then settle up for the exact amount.
- Use an estimated amount.
- Make the buyer responsible for all taxes and the buyer can account for this in the purchase price offer.
Talk to your real estate agent about common practices in your area. While you want to protect yourself, getting a good deal done can be worth far more than dividing property taxes to the cent.
Who pays property taxes — the homeowner or mortgage lender?
Most mortgage lenders pay property taxes directly. They don’t want to deal with potential tax liens or foreclosures if you don’t pay your taxes.
Your lender will estimate your property taxes, divide them by 12, and have you make monthly escrow payments. Your lender pays the taxes from your escrow money.
If your property taxes go up, your mortgage payment will usually increase unless you had other escrow expenses go down.
Talk to your lender about how they handle early payment discounts for property taxes. Some pay early if you ask. Others always wait until the regular payment deadline.
If your lender won’t pay early, you can pay directly. Contact your lender and provide proof of payment so your lender doesn’t pay your taxes twice.
If your lender pays your taxes twice, you may be able to request a refund from your tax collector. Otherwise, your tax collector will likely keep the money on your account until next year and you’ll get a lower property tax bill.
Why do property taxes go up when you buy a home?
Many states have limits on property tax increases for current homeowners. They might limit the annual increase to a certain amount or freeze the home’s assessed value even when home values are increasing.
When you buy a home, your first property tax bill will usually be based on your home’s current fair market value.
The seller may have also had exemptions you don’t qualify for such as senior citizen property tax exemptions.
Should you buy a home with unpaid taxes?
Be careful when buying a home with unpaid taxes. Not paying property taxes is often a sign the seller had financial problems and may not have been able to properly maintain the home.
If you’re buying directly from the seller, there are usually two things that can happen:
- The taxes are late but there’s no lien yet. You’ll be responsible for paying them if you don’t have the seller pay at closing.
- There’s a tax lien. The seller won’t get any money from the sale without paying off the tax lien, outstanding mortgage, and other liens on the home. If your offer isn’t enough to cover this, the sale won’t go through.
Check with your real estate agent or real estate lawyer for the specific details for where you’re buying.
If you’re buying from a tax auction or foreclosure sale, check whether your offered price will cover the taxes or you’ll need to pay them separately. Again, be aware that many of these homes may have serious issues, and your ability to get an inspection may be limited.
When you buy a new home…
- Before closing, visit the tax collector’s website to verify all property taxes have been paid or any unpaid amounts are what you’re expecting.
- Immediately after closing or when the deed is recorded, contact the tax collector to update your name and mailing address. If they say they’ll do it automatically, verify. You don’t want property tax notices going to a different mailing address.
- Immediately apply for homestead exemptions or other property tax benefits you might be eligible for. If you wait, you might miss a deadline and have to pay more.
- Be aware that deadlines and timelines may be different than where you used to live. Even some cities or counties in the same state don’t use consistent dates.
Can you transfer your homestead exemption or other property tax benefits when you move?
Property tax benefits usually go by state.
If you move within a state, you can normally transfer all or at least a portion of your benefits from your old home to a new home. You’ll usually need to sign paperwork that you’re changing your primary residence.
If you move to another state, you’ll usually lose your existing property tax benefits. Once you become a primary resident of the new state (sometimes on day one), you’ll be able to start fresh with any property tax benefits that state offers.
If you didn’t sell your old home…
Notify your property tax collector that the home is no longer your primary residence. This may increase your property taxes either immediately or for next year.
If you don’t notify your tax collector, you’re risking owing back taxes and potential fines. Claiming your old home as a primary residence may also make you ineligible for property tax benefits on your new home.
Act quickly!
I hear “I didn’t know I had to apply for ______ by _______ and now I’m paying more” all the time. You can sometimes apply late, but you’re usually out of luck.
Call or visit your local tax collector, property tax appraiser, or whatever your city or county calls them ASAP after you buy a home.
