Timing of Property Tax Payments due from Home Buyer

[acqflisu]

My understanding of the property taxes that we paid for on Mar 1, 2011 were for taxes from the period Jan 1, 2010 to June 30, 2010.

If we were to sell our house and close on Sep 1, 2011, then at closing we would owe taxes for the period from July1, 2010 clear through till Aug 31, 2011, correct?

If this is true, then when will the first payment be due from the Buyer for Property Taxes and for what period?

Thanks for your help

 

[CyAg]

At closing all is prorated backwards or forwards, it will work itself out.

If you buyer has a loan, they will require enough at closing for whatever is needed for the first tax payment

If using a realtor they can calculate it as part of a closing settlement estimate.

 

[Three4Cy]

Iowa property taxes are in arrears, right now - "Taxes for July 1, 2009 to June 30, 2010, Payable Sept 2010 and March 2011."

In September 2012, you would be paying July 1, 2010 to June 30, 2011. If you close in September, you would be responsible for having the taxes paid through September 2011.

On the HUD settlement statement, you will have a charge for the taxes to have them paid through the closing date, and the buyer gets a credit. The same can be said for the house you purchase, you will get a credit, and the seller is charged.

The mortgage lender for the buyer will escrow enough money at closing to ensure the taxes are paid in September.

 

[Clonehomer]

So if we are buying a house on June 1, 2011 the first tax bill is due Sept 2012?

 

[acqflisu]

More details on our situation. We are selling our house by owner. We have found a couple that are very interested in purchasing, but are in another city until June of next year. They already own a house.

I am trying to create a win/win scenario where they make the purchase now to secure the house and a lock in a low interest rate. We would remain living in the house and pay them rent until we get a house built. They are trying to figure out the finances and whether they can pull it off. Our rent payment will most likely cover their P&I mortgage payment. I am wanting to know precisely how much reprieve they will have in paying the taxes on our house after closing.

Sounds like we make the arrears payment at closing to get them paid up to date. If the closing is July 1, 20011, the Buyer is responsible for the taxes from that point forward. His/her first "out of pocket" tax payment would be due September 2012.

Do I have this correct?

 

[Trice]

Iowa property taxes are in arrears, right now - "Taxes for July 1, 2009 to June 30, 2010, Payable Sept 2010 and March 2011."

In September 2012, you would be paying July 1, 2010 to June 30, 2011. If you close in September, you would be responsible for having the taxes paid through September 2011.

On the HUD settlement statement, you will have a charge for the taxes to have them paid through the closing date, and the buyer gets a credit. The same can be said for the house you purchase, you will get a credit, and the seller is charged.

The mortgage lender for the buyer will escrow enough money at closing to ensure the taxes are paid in September.

Another somewhat related question: if you just sold your home and paid to bring the taxes current, is that tax-deductible the same way your "regular" property tax payments are? Or are there extra hoops to jump through?

 

[isufbcurt]

Another somewhat related question: if you just sold your home and paid to bring the taxes current, is that tax-deductible the same way your "regular" property tax payments are? Or are there extra hoops to jump through?

Yes whatever interest and property tax payments you paid during the year are deductible on that years tax return.

 

[Jambalaya]

More details on our situation. We are selling our house by owner. We have found a couple that are very interested in purchasing, but are in another city until June of next year. They already own a house.

I am trying to create a win/win scenario where they make the purchase now to secure the house and a lock in a low interest rate. We would remain living in the house and pay them rent until we get a house built. They are trying to figure out the finances and whether they can pull it off. Our rent payment will most likely cover their P&I mortgage payment. I am wanting to know precisely how much reprieve they will have in paying the taxes on our house after closing.

Sounds like we make the arrears payment at closing to get them paid up to date. If the closing is July 1, 20011, the Buyer is responsible for the taxes from that point forward. His/her first "out of pocket" tax payment would be due September 2012.

Do I have this correct?

First of all---you have a very FLIMSY deal going there.

Fanny Mae/Freddie Mac/FHA/VA have become very strict with your scenario.

Very few if any lenders will allow the buyers to rent you back the house for that long... If their lender finds out they don't occupy your home within a short few weeks after closing---the lender may call their loan due immediately....

They are technically buying it as a RENTAL PROPERTY......IF they are....then that is much different.

The question--can they buy and close on buying your home while living elsewhere for several more months?

OBTAIN A PRE-QUALIFICATON LETTER FROM THEIR BANK OR CREDIT UNION asap.

Call their lending agent with questions

As for taxes in iowa..... If you are up-to-date with property taxes (paying the March 1, 2011 installent), and close on August 1, 2011--you are correct.

Hypothetically closing on August 1, 2011 ?? There will be a tax proration/credit/rebate FROM YOU to the BUYER for taxes unpaid for July 1, 2010 through July 31, 2011. Take your yearly property taxes/12 months x 13.

This amount will come off your 'sales' PROCEEDS on the HUD-1 at closing. On paper.

If this is a FISBO, you will also pay a $350-$800 fee to hire an attorney and/or closing /escrow agent for the title search, abstracting, closing fee--- then there are Tax Stamps paid.

The closing /escrow agent and/or attorney needs to provide you an estimate of your closing costs i.e., what you net after your liens/mortgages are paid, and the title work/tax rebate is paid.


If your buyer is paying cash for your home...that would be ideal, but the tax proration credits are still in effect.. Still request a letter from buyer's attorney/banker/ accountant verifying their funds to pay CASH

 

[acqflisu]

Fanny Mae/Freddie Mac/FHA/VA have become very strict with your scenario.

Thanks for your feedback and suggestions. I think we've got the basics of a sale pretty well covered, but needed to verify this prop tax timing thing. I will check with our lender and some others about the sell and rent back possibilities and barriers.

 

[Three4Cy]

Thanks for your feedback and suggestions. I think we've got the basics of a sale pretty well covered, but needed to verify this prop tax timing thing. I will check with our lender and some others about the sell and rent back possibilities and barriers.

What was said about the person buying your property and it being considered a rental property is spot on.

The person buying your home would need at least 25% down to buy your house, and they would need to qualify for the loan being able to make their current house payment and the payment on your house. Additionally, if the investor is Fannie Mae, they need a 720 credit score, and at least 6 months reserves. They cannot use the rental income they are getting from you to help them qualify.

The only way I see this deal working is if the bank/credit union doing the loan is going to portfolio it on their books and not sell it to an investor. If this is the case, than you can throw the rules for Fannie and Freddie out the door. Although, most banks/credit unions still follow the investor guidelines because they eventually want to sell the loan, and it must meet investor guidelines when they sell it.

One other thing - never close a loan on the first of the month, you always want to close the last week of the month, preferably the last day of the month. This saves you money as closing because you have to pay interest from the day you close to the end of the month. If you close the last day of the month, you only pay 1 day interest, whereas closing on the first of the month, you pay 30 days interest. This is done so you have a month off before you make your first payment.

 

[ricochet]

One other thing - never close a loan on the first of the month, you always want to close the last week of the month, preferably the last day of the month. This saves you money as closing because you have to pay interest from the day you close to the end of the month. If you close the last day of the month, you only pay 1 day interest, whereas closing on the first of the month, you pay 30 days interest. This is done so you have a month off before you make your first payment.

Not really seeing how it saves you any money. The interest starts accruing as soon as you close on the loan, doesn't matter where in the month it is. You do get a slightly lower closing cost but then the first payment comes 3-4 weeks sooner. In the overall house buying process it seems like a pretty insignificant thing to worry much about.

 

[Jambalaya]

Thanks for your feedback and suggestions. I think we've got the basics of a sale pretty well covered, but needed to verify this prop tax timing thing. I will check with our lender and some others about the sell and rent back possibilities and barriers.

No problem...you still need some sound verification from the buyer's lender/bank. You're selling it as an investment property to them, 'cuz they either won't have their own home sold for awhile, or you want to remain in your sold home as renter.

 

[kingcy]

So if we are buying a house on June 1, 2011 the first tax bill is due Sept 2012?

No. The tax bill starts when you buy the house, prorated for the year.

 

[Three4Cy]

Not really seeing how it saves you any money. The interest starts accruing as soon as you close on the loan, doesn't matter where in the month it is. You do get a slightly lower closing cost but then the first payment comes 3-4 weeks sooner. In the overall house buying process it seems like a pretty insignificant thing to worry much about.

It saves you money on your closing costs, and there can be a decent savings. Simple example - close on the 30th of the month pay 1 day of interest at $20/day = $20.00. Close on the first of the month, pay 30 days interest at @ $20/day = $600.00. Total savings $580.00. May seem insignigicant to you, but to many buyers, closing costs are their biggest issue, and saving ANY amount money is important.

 

[Anonymous]

The answers provided by others are what may be customary in Iowa (it differs from state to state). If you want to set up a different allocation of real estate taxes (i.e. shoulder the burden of the real estate taxes for the first year), nothing is stopping you from contracting around customs. You can either (i) allocate real estate taxes in a non-customary fashion in the purchase contract or (ii) include real estate taxes as a part of your rent payment (i.e. have tenant pay taxes that are due in payble during the lease term).

 

[Jambalaya]

It saves you money on your closing costs, and there can be a decent savings. Simple example - close on the 30th of the month pay 1 day of interest at $20/day = $20.00. Close on the first of the month, pay 30 days interest at @ $20/day = $600.00. Total savings $580.00. May seem insignigicant to you, but to many buyers, closing costs are their biggest issue, and saving ANY amount money is important.

If you close early in the month--you are basically pre-paying a month's interest payment

Closing on August 5, for example--your first pmt is Oct 1st, and you're paying for 26 +days of pre-paid interest (remaining days in August till Sept 1st) at closing

But you also get 7 1/2 weeks to make your very first pmt.

Closing on August 31st? You bring minimal $$ for pre-paid interest to close---but your first pmt is in 4 short weeks.

You really don't 'SAVE' jack squat by closing late in the month. In fact--if the parties agreed on the purchase agreement to have the seller credit the buyer for closing closts and pre-paids---you might as well close in the first week of the month

--the 'seller credit' on the HUD-1 covers the pre-paid interest; and the buyer has 7-8 weeks before their first monthly pmt