How to Calculate Prepaid Taxes at Closing

When buying or selling a property, it is important to understand how prepaid taxes are calculated at closing. Prepaid taxes are the portion of property taxes that the buyer or seller is responsible for paying at the time of closing. These taxes are typically paid in advance to ensure that the property taxes are paid in full for the year.

Calculating prepaid taxes involves determining the total annual property tax amount and prorating it based on the number of days each party will own the property during the tax year. Here is a step-by-step guide on how to calculate prepaid taxes at closing:

1. Obtain the total annual property tax amount: The first step is to find out the total amount of property taxes for the year. This information can be obtained from the county tax assessor’s office or from the previous year’s tax bill.

2. Determine the closing date: The closing date is the day when ownership of the property is transferred from the seller to the buyer. This date is crucial for calculating the number of days each party will own the property during the tax year.

3. Calculate the daily tax rate: Divide the total annual property tax amount by the number of days in the tax year to obtain the daily tax rate. For example, if the annual property tax is \$4,000 and there are 365 days in the tax year, the daily tax rate would be approximately \$10.96.

4. Determine the number of days each party will own the property: Subtract the closing date from the last day of the tax year to determine the number of days the seller will own the property. Subtract the closing date from the first day of the tax year to determine the number of days the buyer will own the property.

5. Calculate the seller’s prepaid taxes: Multiply the daily tax rate by the number of days the seller will own the property. For example, if the seller will own the property for 100 days, the seller’s prepaid taxes would be approximately \$1,096.

6. Calculate the buyer’s prepaid taxes: Multiply the daily tax rate by the number of days the buyer will own the property. For example, if the buyer will own the property for 265 days, the buyer’s prepaid taxes would be approximately \$2,911.60.

7. Adjust the prepaid taxes at closing: The seller will receive a credit for the prepaid taxes they have already paid for the portion of the tax year they owned the property. The buyer will be responsible for paying the remaining prepaid taxes at closing.

8. Calculate the net prepaid taxes: Subtract the seller’s prepaid taxes from the buyer’s prepaid taxes to determine the net prepaid taxes. In the example above, the net prepaid taxes would be approximately \$1,815.60, which the buyer would pay at closing.

1. Can prepaid taxes be negotiated between the buyer and seller?
Prepaid taxes are typically prorated based on the number of days each party owns the property and cannot be negotiated.

2. What happens if the closing date changes?
If the closing date changes, the prepaid taxes will need to be recalculated based on the new closing date.

3. Can prepaid taxes be refunded if the property is sold before the end of the tax year?
No, prepaid taxes cannot be refunded if the property is sold before the end of the tax year. The buyer assumes responsibility for the remaining prepaid taxes.

4. Are prepaid taxes included in the closing costs?
Yes, prepaid taxes are typically included in the closing costs and are paid by the buyer at closing.

5. What if the property tax amount changes during the tax year?
If the property tax amount changes during the tax year, the prepaid taxes will need to be adjusted accordingly.

6. How can I verify the property tax amount?
You can verify the property tax amount by contacting the county tax assessor’s office or reviewing the most recent tax bill.

7. Can prepaid taxes be financed as part of the mortgage?
Yes, prepaid taxes can be included in the mortgage if the buyer chooses to do so.

8. What happens if the seller has overpaid the property taxes?
If the seller has overpaid the property taxes, they will receive a credit or refund from the tax assessor’s office after closing.