States and localities usually assess property taxes on an annual basis, which is convenient if you owned the property for the entire year. However, if you buy or sell the property mid-year, you'll have to figure your prorated share of the property taxes. To prorate the taxes, you need to know the annual property taxes levied and the property tax year for each taxing governing body. Your state or locality might not use the same calendar year, so you may have to calculate the prorated portion of each property tax separately.
Property Tax Proration
The easiest way to prorate your property taxes is to use a tax proration calculator. They're available on the internet, and you can punch in all the numbers and get a quick response.
However, if you can't find a real estate proration calculator, you can also make the calculation yourself. Count the number of days that you owned the property during the property tax year for each property tax year. For example, the county might use a tax year from May 1 through April 30, and your school district might go from August 1 through July 31. As a result, if you sold your home on Aug. 15, you would be responsible for 107 days of county property taxes and 15 days of school district property taxes. If you bought the home, you would be responsible for 258 days of county taxes and 350 days of school taxes.
Next, divide each type of property tax by 365 to find the property tax per day. For example, if the property tax for the entire year is $2,920 for the county and $1,460 for the school district, divide $2,920 by 365 to get $8 per day for the county tax and $1,460 by 365 to get $4 per day for the school district tax. That's a total of $12 per day in taxes. You can then multiply the number of days you owned the property by the tax per day to find the prorated property tax for each governing body. In this example, multiply the county rate of $8 per day by 107 days to find you owe $856 for the county. Then, multiply the school district rate of $4 per day by 15 days to find you owe $60 for the school district, for a total of $916.
When the Prorated Taxes are Paid
When you buy a new house, the seller is responsible for the taxes incurred while he still owned the property, and you will be responsible for the taxes incurred after closing. Since property taxes are paid ahead, the seller may have already paid taxes for the period after the sale. In that case, at closing, the buyer must reimburse the seller for the prorated portion of the taxes the seller paid that will cover the post-closing period. This exchange of property taxes will be reflected on the settlement statement at the closing.
How Tax Liens Affect the Sale
If the seller is behind on the property taxes, they generally attach as a lien on the property, so when you buy the property, they must be paid in full before the loan will close. These liens are the seller's responsibility; he must pay these liens from the proceeds of the sale after paying off any mortgages. Federal income tax liens may also be present on the property if the seller owed money to the IRS and didn't pay it back. Because all lienholders -- including the mortgage company and the taxing authorities -- must be paid in full before closing can occur, the sale price must be enough to cover them all. If the sale price isn't enough, the seller may need to negotiate with the lienholders and obtain their consent to release their liens for less than the amount due before closing can proceed.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."