A primer on property taxes

DEAR BERNICE: Do I have to pay 2008 or 2009 taxes in escrow? What things should I be considering before going ahead? Please point me in the right direction. I really appreciate your help. --Frank P.

DEAR FRANK: I assume that you're asking about property taxes, but city, state and federal taxes can also be issues that you must address before you close your transaction.

The amount you will have to pay in property taxes is contingent upon the time of year that you close. If you are putting less than 20 percent down, your lender may require you to pay one-twelfth of your property taxes each month as part of your mortgage payment.

These monies are deposited on your behalf into an impound account. At tax time, the lender pays your property taxes. As part of your closing costs, the lender will collect several months of taxes to set up the impound account.

The rates and ways in which taxes are assessed vary tremendously. Various taxing entities such as cities or school districts have the right to levy taxes against your property. This may be a flat percentage of the sales price with an adjustment each year (the system used in California under Proposition 13) or it could be based upon a percentage that each taxing entity levies in combination of the appraised value.

In Texas, for example, the county appraisal district appraises the value of each home. The school district, the city and several other entities then assess a specified percentage of that amount as the tax.

When and how taxes are collected also varies. To illustrate, if you were to buy a home in California, the seller's tax rate might be significantly lower than the rate that you would pay once you close on the property. If the sellers had been in the home for 20 years and paid $100,000 for the property, their tax rate would be $1,200 per year plus a maximum 2 percent increase each year.

If you paid $500,000 for the property, then your tax rate would be $6,000 per year. The escrow agent would prorate the percentage of taxes that would be owed under the old rate. After you close, the county where the property is located will reassess your property based upon the new sales price. They would then issue a new tax bill.

Depending on whether your property has decreased or increased in value, you could receive a refund or a much higher bill. Again, this depends upon the difference in the seller's current appraised value and your current purchase price.

Many buyers see that the property taxes are prorated at closing and believe that they have handled their property tax obligation. If you are assessed at a higher amount than the previous owner, your "supplemental tax bill" may arrive as an unwelcome surprise. ...CONTINUED

All rights reserved. This article may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this article without permission is a violation of federal copyright law.