Tax prorations continue to be a hot topic due to the investment property tax rate being substantially higher than the owner occupied tax rate. Many sellers when taxed at the investment rate of 6% want the attorney to prorate at the occupancy rate of 4% when selling property to an occupying buyer. However, the current contract does not allow for such proration. The contract states that “tax prorations are to be based on the tax information available and deemed reliable by the Closing Attorney on the date of closing and to be prorated on that basis.”
The only information that the closing attorney could possibly deem reliable is either last year’s tax bill or a tax statement provided on the tax assessors’ letterhead. Many agents and sellers want the closing attorney to prorate by using the county’s tax estimator to determine the owner occupied tax rate. Using the tax estimator is problematic for two reasons. First, there is no guarantee that the buyer will qualify for the owner occupancy tax rate. Secondly, the tax estimators provided by the counties state that the information is an estimate only and may not be deemed reliable. Since the contract requires the closing attorney to prorate based on tax information deemed reliable, the tax estimator fails to meet that qualification.
In addition, do not promise the parties that the taxes will be reprorated after the tax bill is issued. Per the contract tax prorations are final as of the date of the closing and the parties, absent a written agreement to the contrary, are not required to reprorate taxes when the actual bill is issued.
While we recognize that the occupying buyer may receive a financial benefit from the 6% proration, the seller should recognize that they were already slated to be taxed at the 6% for the tax year. The seller is not necessarily entitled to benefit from the fact their buyer is going to occupy the house. Under our current tax rate system, someone is always going to benefit in these situations.