If you have ever bought or sold a home, you know that there are all sorts of charges that you incur in addition to the purchase price, which are known to most as “closing costs.” We all know about them, but estimating the final number can be elusive if you are not familiar with the process. In the next four emails, I am going to shed some light on calculating the closing costs, so that you can better understand what the home is really going to cost you as a buyer or what you can expect to walk away with as a seller.
Real Estate Taxes
The real estate tax credits at closing are only two, maybe three, line items on the settlement statement, but they are so significant that they deserve to be discussed all by themselves.
In Cook and the collar counties, real estate taxes are paid in arrears. That means you are always paying last year’s tax bill. On the closing date, there will always be taxes owed by the seller that have not yet been billed by the county. Once the sale closes, the buyer will be responsible for paying those future tax bills. The customary way to handle this problem is for the seller to give the buyer a credit at closing to cover those tax bills. It is more secure that asking the seller for a reimbursement when the bills are issues and less cumbersome than putting money in an escrow to pay the bills.
The real estate tax credit is generally based off of the last known tax bill, which is then increased by 5%-10%. The credit is prorated through the closing date.
As an example, let’s say that you close the sale of you home on February 15, 2016, which is the 46th day of 2016, and your 2014 tax bill was $5,000. The 2015 bills are not out yet, so this is the last known tax bill. If the tax credit is based on 105% of the last tax bill, your tax credit looks like this:
2015 – $5,000 x 1.05 = $5,250
2016 – $5,000 x 1.05 / 366 * 46 = $659.83
If the closing is a little later in the year, and the first installment taxes have been paid, the credit is reduced by the amount already paid by the seller.
In Cook County, once the second installment tax bill is issued, usually in July, that amount is used to calculate the tax credit. In collar counties, the full year tax bill is issued all at once, usually in May. Additionally, if taxes are owed at time of closing, that amount will be paid directly from the closing proceeds, in which case the amount paid is deducted from the real estate tax credit.
Importantly, real estate taxes can be very complicated. Your attorney must conduct research to ensure that the credit contemplated in the contract is appropriate. If the property assessment has jumped significantly (which happened in Chicago in 2015), an alternate method of calculating the credit is necessary to arrive at a fair figure. Likewise, if there has been a successful appeal of the assessment, the credit should be reduced accordingly. Choosing the wrong real estate attorney who is not familiar with real estate tax related issues can cost you thousands!
It is crucial to have the right professionals in place to protect you from coming up short come real estate tax time. If you have questions about real estate taxes, or any other real estate matter, as always, you can contact me at firstname.lastname@example.org or 773-632-8330. To see what my clients have to say about me, please visit me at avvo.com.