Property Taxes. Something so simple gets complicated.

One of the things that people have the hardest thing getting their heads around in a real estate deal is property taxes.  I’ve had a number of meetings, both before and after the transaction has been done, trying to explain the accounting associated with property taxes.

To be fair, the math and payment terms can be a little inconsistent with common sense.   Throw in the purchasers’ lender in the mix, and it can create quite numerical tornado.

As a starting point, be aware that every municipality will have its own payment terms on property taxes.  The due date for some will be earlier in the year than others.  Some municipalities will have discounts if the taxes are paid by an earlier date.  Most, however, will require payment of the property taxes in full prior to the end of the year.  Some of the municipalities will have financing programs, like TIPPS in Regina, that allow you to pay taxes in monthly installments.  These installment plans will allow you to pay throughout the year in exchange for a small financing charge.

The adjustment that we do as part of a real estate closing is about paying back someone that has prepaid too much of their taxes, or getting a discount on the transaction if they haven’t paid enough.   When someone pays their year’s taxes in full in June, the adjustment they get in July is for the 6 months that they prepaid that the purchaser is going to receive the benefit of.  If the parties are on TIPPS, and have only paid for 6 or 7 months, the adjustment will be much smaller.

Let’s use a common example for a property tax adjustment in July.

Joe and Frank buy a condominium in Regina for July 5, 2019.  The property taxes are $2,400 a year, or $200 a month. The seller was on the TIPPS, and paid monthly installments up to and including the one on July 1, 2019. (A total of $1,400)  The lender that they have used has requested that they either have the lender collect property taxes, or that they enrol in TIPPS.

Joe and Frank will need to repay the seller for the prepaid taxes from July 5 until July 31.  We do a per diem calculation, but lets assume that the seller should have paid $1,230 of the $1,400.  Joe and Frank will need to repay the seller by adding $170 to the purchase price of the property.

Joe and Frank think it will be easier to have one payment, so they ask their lender to collect their property taxes for them.  This can cause confusion.  Why?  Because:

1. The lender will often expect that any deal after the tax due date (or sometimes earlier) will have the taxes paid in full.  They will expect that Joe and Frank pay all of the remaining taxes for 2019, either at the time of purchase, or as required by the municipality.
2. The lender is not going on TIPPS.  They are collecting a monthly amount so they can pay in one lump sum at the municipal due date.  Accordingly, they need to start collecting taxes in July 2019 to pay taxes in June of 2020.
3. 1 and 2 combined mean that for the first 6 months of the purchase, Joe and Frank could be paying double the amount of taxes.  One set of taxes to repay the amounts outstanding in 2019, and one set of taxes to gather enough in the tax account for payment in full for June of 2020.

If this happens earlier in the year, there can be a couple of different outcome that can occur:

1.  The lender may pay the taxes but they do not have enough in their tax account to cover them.  They will either charge you more on a monthly basis to catch up, or ask for a lump sum.
2. The lender may reduce your mortgage proceeds by an amount necessary to bring the mortgage account up to date.

As a side note, you should know that your lender may have a fee associated with providing this service for you.  Depending on the lender, it can be between $25-100 or more.  They will also charge interest on any deficiency in the tax account.

As an additional note – if you do have your lender collect your property taxes, and you are selling your place – they will simply apply the amount in the tax account as against the mortgage when you pay it out.  The adjustments may look weird because it will look like you have not paid your taxes (because you have not paid them to the city at that point), but the amount will be taken into account in reducing your mortgage payout.