At the closing of a house sale, a purchaser will normally need to pay a little money for real estate taxes. She does not cover the government, though, since the government has already collected its money in the home for the current tax period. It got that money from the previous homeowner–the seller. The seller collects the buyer’s real estate tax payment at closing.
Property taxes are usually paid twice a year, and they are paid in advance. A typical billing schedule requires payments due on the first day of March and the first day of September. The initial payment covers the six-month interval from March to August; the second covers September through February.
Chances are, the settlement date for a house sale will fall someplace in the midst of a tax period. Say that a house with the tax schedule described above includes a sale closing date of June 27. That is three weeks and 27 days to the six-month cycle.
As part of this closing, the settlement agent divides the taxation period to two parts: the time that the seller owned the home and the time that the buyer owned the home. The branch follows the principles set down by the IRS for deducting real estate taxes from taxable earnings: The seller is responsible for the property taxation up to–but not including–the date the home was sold. The purchaser is responsible for taxation on the sale date and afterward. Generally, the tax invoice is divided first to a monthly fee and then to a daily fee. Say the six-month tax invoice is $2,100. That comes out to $350 per month. For your daily rate, the standard is to divide the monthly fee by 30 (regardless of which months are in fact involved). That produces a daily rate of $11.67. In the case above, the seller is responsible for 3 months and 26 days (not 27, since the 27th day is your sale ). The purchaser is responsible for two months and 4 days. That is $350 + $350 + (4 x $11.67) = $746.68.
At closing, the buyer reimburses the seller for the property taxes that have already been paid for the period starting from the date of sale to the end of the tax period. The purchaser in the case above would thus have to pay the seller $746.68 as part of their settlement. This charge will be recorded on the settlement statement given to both the buyer and seller.
To facilitate a sale, a seller may offer to skip reimbursement for the buyer’s portion of their property taxation –in effect, giving the purchaser a”tax-free” beginning to his possession of the house. But, for the purpose of deducting property taxes on their income taxes, the IRS rules apply. The buyer and seller can deduct only the property tax equivalent to their possession of the house –regardless of who actually paid the tax.