Prorating tends to lead to confusion in the real estate closing process. Because property taxes are paid in arrears, when you buy a home in Illinois, you are basically inheriting the existing tax bill from the seller. The seller owes the taxes for the period of time they have owned the property, but it is the buyer who will be responsible for paying those taxes when they come due.
When a home is sold, the taxes must be paid from the first of the year until the date of the transfer. The buyer then has liability for paying taxes effective from the date after the transfer is complete. However, in a market where homes are overvalued, the tax estimates and average percentages used for proration might not work.
Property Values and Appraisals
The two main elements affecting real estate tax prorations are property values and appraisals.
Property values are high, selling from $10,000 to $90,000 over asking price. This is because people are anxious to leave the city and find a safe place with a backyard where their kids can play. More people are working remotely, so they can choose to live wherever they please.
This is increasing the demand for homes in the suburbs. Property values in 2021 outside the city are quite inflated right now so when the assessor looks at the sale price, this is what they are using to determine tax bills for 2022. This is problematic because when assessors use these prices, they can assess homes at a price way over the actual property value.
Estimating Property Taxes for Homeowners
These assessments affect people who are staying in their homes, who could end up paying higher taxes than they might have in a more normal market. As a result, they can appeal their assessment. However, this takes skill and time to prove the assessment is incorrect, which often requires that homeowners engage a real estate attorney to do it for them.
Further, during a sale closing, it is also important that the real estate attorney advocates to protect the buyer from not receiving the credits that they should be getting.
The Challenge for Real Estate Contracts
When it comes to a real estate contract, the tax proration is calculated at a percentage. In the suburbs, this tends to average out at about 105% of the previous year’s taxes. This provides consideration for possible increases on the next assessment in most cases. The challenge with this process is that it is based on “normal times” when homes are not overvalued. This makes it more difficult to account for differences that could increase the taxes much higher than the usual 105%.
So in this case, a higher percentage might be needed. A real estate agent can put the tax proration at 150%, but the seller can refuse this and counter offer at 110%. If the buyer agrees, then this can be a negotiated term in the contract. But what if it could have been higher? The better approach is to enter TBD, allowing attorneys to look at the details of the sale and compare the sold price to the assessor’s valuation.
If they see these numbers are close, they can use this information as a guideline to increase the percentage. Adjustments can be made to 150% and then the seller and buyer’s lawyers can negotiate on their client’s behalf. If a percentage is entered into the contract by the real estate broker, negotiations take place between the buyer and seller, which means the buyer could lose out. Also, by using TBD, it affords good real estate counsel the opportunity to make sure the correct exemptions were taken and that they will be carried forward for the buyer.
Bottom line: it is always best to include a real estate attorney in the real estate contract process to ensure the tax proration is calculated accurately and fairly.
The Minchella & Associates Difference
With over 40 years of experience in Illinois real estate law, Erica Minchella is an expert at guiding clients through the maze of tax matters in real estate transactions. Schedule a consultation today.