Prorated Property Taxes

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January first and July first mark turning points in the year for California real estate, as property taxes are collected for a period running from July 1 through June 30. They are paid in two installments, the first due due November 1 (past due December 10) that covers the first six months, from July 1 to December 31. The second is due February 1st (past due April 10th), and covers the second six months, from January 1 to June 30. Other states have different set ups. For instance, Nevada property taxes are paid quarterly.

Most folks don't actually pay their taxes until just before the "past due" date. If you have an impound account, the bank doesn't send the money until sometime around December 8th and about April 5th, respectively. But they are due and payable on the dates above, and whether you are refinancing or selling or buying, if they are due they need to paid either before the transaction is consummated, or through escrow. Prorated taxes aren't part of refinance transactions. If they're due, they have to be paid, and the current owners need to pay all of them. But for sales, what happens is the property taxes are paid past the date of the sale, or not paid up in full through the date of the transaction.

Let's pick a date the transaction closes. Say June 15th. The taxes were paid back in April through June 30 by the seller. But the seller didn't owe taxes past June 15th; they don't own the property any more after that. The buyer owes the other fifteen days' worth. So the way it is handled is that the buyer comes up with, in addition to the purchase price, fifteen days of property taxes and pays those to the seller as part of the transaction. This way the county gets its money on time, and everyone is still even.

If the effective date of the sale was, on the other hand, July 31st, and the seller has paid only through June 30th, then the seller will owe the buyer for taxes for the month of July, because the buyer will be paying those come November. So thirty-one days worth of taxes are taken off of the sales price by escrow and given to the buyer because they will be paying for those thirty-one days worth of taxes in November.

Prorated sales taxes are part of most sales transactions. The only exceptions are those taking place within the periods from November 1st to December 10th, and February 1st to April 10th, where taxes are paid through escrow, and not even those if the current owner already paid the taxes. Be advised that during the last couple of days it can be tough to get an written receipt that you paid before past due, especially if you have to walk them in, so if the transaction hasn't recorded at least three or four days before the end of the grace period, you want to go ahead and pay the taxes. If the transaction doesn't close, the government doesn't care why they weren't paid before the end of the grace period; you'll have to pay a penalty for being late.

Caveat Emptor

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About this Entry

This page contains a single entry by Dan Melson published on July 4, 2021 7:00 AM.

Real Estate Transactions: If You're Spending Money, Make Sure You Get Something Valuable For It was the previous entry in this blog.

Weighted Average Cost of Capital Doesn't Include Everything is the next entry in this blog.

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