UNDERSTANDING HOW PROPERTY TAXES ARE ALLOCATED AT CLOSING
One of the many issues addressed at a real estate closing is property taxes. Property taxes for that year must be paid at closing, even if payment to the town isn't actually due for several months. By law, the Seller's responsibility for accruing property taxes continues right up until the day before closing. The Buyer's responsibility starts on, and includes, the day of closing. If the taxes aren't taken care of at closing the Buyer could wind up being on the hook for the full year's tax bill even though he owned the property for only a small portion of the year.
Vermont's two pronged system of property taxes often produces confusion at the time of closing. Property in Vermont is taxed at both a local level and at a statewide level. Local or "municipal" taxes (used for localized infrastructure like town roads, police/fire departments, etc.) are assessed at one rate. The statewide "education tax" is assessed at different rate.
Adding to the confusion is the fact that many towns use different calendar years for each of the two taxes. January 1 through December 31st is the typical calendar for municipal tax, but it's not uncommon to see municipal tax years running from July 1 to June 30 of the following year. The education tax calendar year for each municipality is required by law to run from July 1 through June 30 for every town. As a result, in many transactions two different calendars have to be applied to calculate the Seller and Buyer's share of the property taxes. (Calculating each party's share is also called "prorating" the property tax.)
Perhaps the easiest way to explain how property taxes are allocated is by example. Assume you are buying a residential property in St. Johnsbury and closing is scheduled to take place on February 21st. St. Johnsbury is a town that uses two different calendars for its tax bills. The municipal tax period runs from January 1 through December 31st and the education tax runs from July 1 through June 30th.
Because the closing is taking place before this year's tax bill has been issued (tax bills are typically issued in the spring of each year), we use last year's bill to calculate the pro-rations. Assume last year's total tax on this property was $1000.00. Of that, $300.00 was attributable to the municipal tax and $700.00 was attributable to the education tax.
The first thing to do is calculate the "per day" tax by dividing the annual tax by 365 days in a year. In our example, the per-day municipal tax for the property is $0.8219 (300.00/365) and the per-day education tax is $1.9178 ($700.00/365.)
As mentioned earlier, the municipal tax for St. Johnsbury starts accruing every January 1st. This means that the Seller of property located in St. Johnsbury is responsible for the municipal tax from January 1st until the day before closing. In this example, the Seller is responsible for the municipal tax from January 1 until February 20th, a total of 51 days. Multiply 51 by the per-day municipal tax rate ($0.8219) and you find that the Seller's municipality tax responsibility is $41.91. This amount will show up on the HUD closing statement under "Adjustments for Items Unpaid by Seller." The Buyer basically gets a credit for that portion of the Seller's municipal property tax and the sale proceeds due to the Seller (along with Buyer's closing costs) is reduced by that amount.
The education tax proration is calculated in a similar manner but keep in mind that the education tax bill runs from July 1 of last year through June 30th of this year. And because the Seller paid his tax bill when it came due last November, this means that the Seller has prepaid the education portion of the property tax bill. In other words, Seller has paid that portion of the education tax that will accrue from the date of closing (February 21st) through the end of the tax calendar (June 30th.) The Seller is therefore entitled to an adjustment from the Buyer for the prepayment.
To calculate the education tax proration we use July 1 as the start of the year. February 20th is 235 days from July 1st. This means that the Buyer will own the property for 130 days of the current education tax calendar (2/21 - 6/30). If we multiply 130 times the per-day education tax rate ($1.9178) we learn that the Seller has prepaid $249.31 of the education tax and this is the amount the Buyer will have to reimburse the Seller. This adjustment will be noted in the "Adjustments for Items Paid by Seller in advance" section of the HUD. The Buyer's closing costs are increased by this amount, as is the total sale proceeds due to the Seller.
information provided by The Law Office of Robert A. Brazil, PLLC - See also:
Subchapter 001 : Manner Of Conveying Interests In Or Affecting Realty
(Cite as: 27 V.S.A. § 309)
§ 309. Proration of taxes
(a) Unless otherwise expressly stated or agreed, in any offer or contract for the purchase and sale of real property, real property taxes assessed and payable shall be prorated as follows so that as between the parties, but not otherwise:
(1) In municipalities where the municipal tax and the school tax fiscal periods are July 1 to June 30, the seller shall bear the burden of real estate taxes allocable to the period beginning July 1 of that fiscal year and ending on the day before closing. The buyer shall bear the burden of real estate taxes allocable to the period beginning with the day of closing and ending on June 30.
(2) In municipalities where the municipal tax fiscal period is other than July 1 to June 30, the seller shall bear the burden of real estate taxes allocable to municipal taxes for the period beginning on the first day of the municipality's fiscal year and ending on the day before closing. The seller shall also bear the burden for real estate taxes allocable to school taxes for the period beginning July 1 of that fiscal year and ending on the day before closing. The buyer shall bear the burden of real estate taxes allocable to both school and municipal taxes for the period beginning with the day of closing and ending with the last day of the respective fiscal year.