How are property taxes paid at closing?
How property taxes are paid is a situation that arises and causes the most confusion during a closing.
In Indiana, property taxes are paid in arrears. New tax bills typically come out every April and the bills are for the prior year. The installments that are due on May 10 and November 10 are paid in the current year. For instance, the property tax bills that came out in April 2022 and are due in May and November 2022 are actually for the 2021 taxes.
When filling out a purchase agreement you are given options to determine how taxes are paid at closing. One option is to have the seller pay the next installment of taxes and the buyer takes over afterwards.
Another option that can be chosen is to prorate taxes. When this option is selected, the seller must pay the installments that are due for payment in the current year. For example, if you close on May 1, the seller will pay both the spring and fall taxes on the closing statement. The seller would also give a credit on the statement to the buyer towards the taxes owed next year up until the day of closing. This credit would debit the seller and lower the amount due from the buyer.
When a closing falls in the time before the new bills are issued, we must use the prior year taxes to determine the amount of the credit. That amount is final, and the sellers cannot request a refund from the buyer and the buyer cannot ask for additional funds from the seller when the new bill amounts are known.
Prorating taxes is a very common practice in our area. It would need to be factored in when you are estimating the amount that will be received by the seller or the funds required from the buyer.
We highly recommend seeking the advice from a Realtor to help you understand all of the aspects of selling and buying your home.