Who determines how taxes are prorated at closing? The answer is simple; the contract!
As you know an owner occupant of real property may qualify for the 4% tax rate while a non-owner occupant would be taxed at 6%. This difference could cause a homeowner’s real property tax to nearly triple. The problem with tax prorations at closing occurs when a seller is being taxed at 6% sells the house to a buyer who intends on occupying the house presumably qualifying for the 4% tax rate. The seller and listing agent often want the proration calculated at 4% even though the seller does not qualify for this rate and assuming that the buyer will.
In the Midlands, it is amazing how many closing attorneys believe they determine how taxes will be prorated. Some even have clients sign forms at closing changing the contracted proration terms. Both actions violate the written terms of the Central Carolina Realtors Association contract. The contract states that taxes will be prorated based on last year’s tax bill. The closing attorney does not have any latitude. So if a seller was taxed at 6% last year and the new buyer intends to occupy the house, the buyer will receive the tax proration at the 6% rate. This is the only method that correctly follows the terms of the contract, unless the contract is amended.
The Greenville (state) contract holds that tax prorations are based on the available tax information deemed reliable by the closing attorney. While the contract gives greater latitude to the closing attorney, I argue the only reliable information available is last year’s tax bill. The closing attorney does not know that the buyer will qualify for the 4% rate. (See my post, “A Hidden Tax Provision You Need to Know About.”). There are many parts of the tax statute that people don’t understand. More importantly, the tax estimator used by most county websites state that the information provided is not reliable and should only be used for informational purposes. So if the information is deemed by the county to be unreliable, how can a closing attorney use it as the best information available? Thus, the closing attorney should use last year’s tax bill when determining the proration because it is the most reliable information. The Greenville contract is problematic because it allows for uncertainty because the closing attorneys do the prorations in different manners. The parties don’t know what method will be used until the Closing Statement is prepared.
It is important to note that nothing prohibits the parties to the contract from agreeing to a method for calculating the prorations. However, this should be done at contracting and not at the closing table. Agreeing to a different method of proration at the closing table could result in the buyer bringing more money to closing or the loan going back to underwriting.
It is likely that the client will not be well-verse in these tax issues. It is incumbent upon the agent to have tax proration discussions early in the process.