When your client purchases a home, there are several costs and fees that impact what they end up paying above and beyond their mortgage. One of those fees is residential real estate taxes. These taxes are paid a year in arrears in Illinois and in Lake County, for example, where the tax bills come out June 1 and September 1.
In this blog post, we explain the ins and outs of residential real estate taxes to help ensure a smoother closing.
Why Property Taxes are Paid in Arrears
First, it is helpful to understand why property taxes are paid in arrears. It all stems from the fact that during The Great Depression, real estate taxes were abated for a year. As a result and to this day, we are left in a constant state of catch-up. Real estate attorneys luckily are the ones left to figure out “tax prorations” so that the buyer gets the credit for the taxes to which they are entitled.
Escrow for Real Estate Taxes and Insurance
Next, keep in mind that lenders will likely take an escrow for the real estate taxes and insurance. They take 1/12 of your client’s anticipated taxes and insurance premium and add it to their mortgage payments usually for up to three or four months. This ensures the money is available when the bills are due.
While this might seem like they are taking more than they should, it works in your client’s favor. There is almost always money in escrow to pay taxes and insurance premiums. In addition, thanks to the escrow account, your client can avoid a tax lien being filed against the property. The bank wants to avoid this at all costs because it ultimately undermines their interest in the property, as taxes are a priority over mortgages.
The Impact of Timing
Since property taxes are always in arrears, the seller gives a credit for any taxes owed in the year prior to sale and the year of sale from January 1 to the date of closing. When closing near to the tax bill being due, the lender or title company requires that the funds for that upcoming payment be taken out of proceeds or escrowed at the closing. They do this to ensure the bill is paid. If the amount of the bill has already been published, the title company will know what they need to pay and escrow won’t be necessary. The bill will just be paid out of the proceeds of closing.
This is important because when taxes are unpaid, the tax obligation primes the mortgage. As a result, the property could ultimately be sold at a tax sale. This is not an option for lenders. As mentioned above, lenders don’t want to wind up with a lien against the property which is prior in right to the mortgage.
While it might seem a little scary thinking about unpaid taxes, the escrow account not only protects the lender, but also makes it easier for your clients to pay taxes on time.
We Can Help
With almost 40 years of experience in Illinois real estate law, Erica Minchella has the expertise to interpret residential real estate taxes to help her clients close successfully. Get started by scheduling a consultation today.
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