PROPERTY TAX ACCOUNTS
Most municipalities have a June 30th deadline for paying annual property taxes. This payment covers from Jan – Dec of the year you are in, meaning the June 30th payment is actually covering the 6 months prior (Jan to June) and the 6 months after (July to Dec).
There are 2 ways property tax adjustments can create an upfront cost:
1) Property Tax Adjustment (between you and the seller)
2) Property Tax Account Top Up (between you and the lender)
1. Property Tax Adjustment (between you and the seller)
This calculates how much the seller and the new buyer each owe towards the property taxes that year.
Your lawyer will check how the sellers are paying their property taxes (either monthly or annually). If the seller pays monthly then there won't be as much of an adjustment but if they pay annually and you moved into the home:
Before June 30th - then you as the buyer would receive a credit. Why? You will be the owner when the whole years taxes are due on June 30th (represents Jan-Dec of that year) so if the seller lived there until end-March, then they would owe those 3 months taxes but it's given/credited to YOU in the property transaction. If the lender is not going to be collecting property taxes for you going forward, I would suggest giving this credit to the municipality right away as you will owe it back.
After June 30th - then the seller will be owed a credit. Why? Because the seller would have paid on June 30th, for Jan-Dec of that year. So if you move into the home in September of that year, you will owe the seller for 4 months (Sept-Dec) that you are living there.
2. Property Tax Account Catch Up (between you and the lender - a requirement for insured mortgages)
Lenders send the full years tax payment to the municipality on your behalf every June 30th. PERIOD. That means your property tax account (lender holds in-trust for you) must have the whole years taxes ready to be paid out on June 30th, no matter what your possession date was. This initial amount is collected by your lawyer and from there it will be collected with your mortgage payments.
THE CLOSER YOUR POSSESSION IS TO THE JUNE TAX DUE DATE, THE HIGHER THIS CATCH UP AMOUNT WILL BE.
Jane takes possession of her new home May 31st, the annual taxes are $2,400. The sellers paid their taxes annually. ($2,400/12 = $200/month).
1) Property Tax Adjustment. Possession is before June 30th so Jane would have a credit from the seller for approximately $800 (Jan to May = 4 months * $200/mo)
2) Property Tax Account. The lender will be collecting the property taxes with Jane's mortgage payments, her property tax account catch up will be $2,200 (Total taxes due June 30th is $2,400 - $200 will be collected with her June mortgage payment)
3) Jane will need to pay a lump sum of $1,400 to catch up her property tax account with the lender. ($2,200 ppty tax account catch up less $800 credit from the seller)
This is a general guide only, lender guidelines may vary and can change without notice. Always refer to your lawyer for details.