The tricky thing about property taxes for a home buyer
Property taxes are one of those sneaky closing costs that most people don't plan for and even fewer actually understand. It's no wonder really, given the process in which you pre-pay your property taxes at closing can be confusing and not necessarily intuitive. Today on the blog, we're de-mystifying closing cost property tax payments and giving a few tips to follow when calculating yours.
Property taxes at closing
In a typical real estate transaction, there is an adjustment made at closing with respect to property taxes. Property taxes are due twice a year in the Halifax Regional Municipality and are always due in advance. Therefore, depending on whether property taxes have been paid in advance by the seller or remain unpaid, the seller may either need to be reimbursed for any taxes that have been pre-paid or the buyer may need to pay for taxes in advance at closing. You, as the buyer, will only be responsible for paying property taxes from your date of possession.
The first thing to consider when calculating property taxes at closing is the time of year. Property taxes are billed semi-annually, with payments generally due at the end of April and the end of October. Many homeowners opt to have their property tax bill pro-rated and added to their mortgage payments, so these dates are of little importance. However, for home buyers, it can make a huge difference in how much property tax you have to re-pay to the seller.
In order to complete a home sale, the property taxes must be paid in full. That means, if your seller has been paying a monthly amount with their mortgage payment, the buyer would be responsible for the remainder of their property tax bill, minus the pro-rated payments up until the closing date. For home sales that take place between January and April, the buyer would be looking at about 50% of the semi-annual bill as part of their closing costs. For those buyers, however, that are purchasing in May or June, that bill will look substantially higher, 50% higher, in fact. As spring is one of the hottest times of year for home sales, many home buyers face a full tax bill in addition to their other closing costs. This is why it's a tricky one.
Going forward, you may opt to tie your property tax payments in with your mortgage payment. Allotting your tax payment over 6 months is often a more feasible payment structure. Alternatively, you can separate the two and pay your taxes semi-annually when your tax bill arrives, this option may end up saving you a few dollars but is often less convenient from a budgeting standpoint.
How property taxes are calculated
Property taxes vary but are largely dependent on the current tax rate and your property's latest assessment. Given these variables, it can be difficult to estimate how much you will owe in property taxes at closing. Your real estate lawyer should be able to walk you through this process so you're aware of the amount owing.
If you have any questions about property taxes at closing or in general, we're happy to help!