Are property taxes due at closing?

After buying a home, you’ll have a lot of new responsibilities. You’ll be making a monthly mortgage payment, and included in that, you may be paying a monthly installment on property taxes. If you’re a first-time home buyer, property taxes at closing may not be something you’re tracking too closely, but you may want to. They will be due at closing. When it comes to closing costs, property taxes and the way these fees are calculated, buyers may have to come to the table with several thousand dollars in order to seal the deal.

Property taxes are fees paid to state, county and various local authorities that in turn fund local schools, road upkeep, and water/sewer line maintenance — to name a few municipal services they cover. But these costs can vary based on where you live and when you close. To help first-time home buyers understand how these figures are calculated, we’ve put together this review of the way escrowed property taxes at closing are managed.

In a typical real estate transaction, the buyer and seller both pay property taxes, due at closing. Generally, the seller will pay a prorated amount for the time they’ve lived in the space since the beginning of the new tax year. And likewise, the buyer will pay a prorated amount of property taxes to cover those charges for the rest of that calendar tax year.

Who pays property taxes?

When a home sale closes, a lot of fees are paid — mostly by the buyer. Some of these are the responsibility of the seller and some fees are shouldered by the buyer. And one potentially large amount of cash due is property taxes that are included in closing costs. Because real estate purchases all boil down to the actual agreement, who actually pays property taxes when a house is sold depends on the language in the contract.

Sometimes, the seller will offer to pay for the buyer’s share of taxes as an added bonus. And if the buyer’s really hoping to purchase the home, they may incentivize the seller to select their offer by fronting the funds for the seller’s share of property taxes. These and other closing costs can be key bargaining chips for both sides. Another common tactic is to offer to pay a portion of the seller’s realtor fees — which can be as much as 6 percent of the total purchase price.

How much are property taxes at closing?

It can be a real challenge to get the actual amount due in property taxes because prorating plays such an important role. With each party taking on a portion of the year’s total, that cost will be split down to the date of closing.

Let’s suppose that the buyer and seller both agree to pay their portion of sales tax when the time comes to close on the house. The date of their closing is on June 27th and the total annual property tax amount due is $4,200. Here’s how to calculate property taxes for the seller and buyer at closing:

1. Divide the total annual amount due by 12 months to get a monthly amount due: $4,200 / 12 = $350 per month
2. Divide the total monthly amount due by 30: $350 / 30 = $11.67 per day on a 30-day calendar
3. Determine the seller’s amount due: The seller is responsible for 5 months and 26 days: 5 x $350 = $1,750 + $11.67 x 26 = $303.42 for a total of $2,053.42
4. Determine the buyer’s amount due: The buyer is responsible for 6 months and 4 days: 6 x $350 = $2,100 + 11.67 x 4 = $46.68 for a total of $2,146.68

Getting the math right is usually the responsibility of your lender or title company – they’ll get you a “cash due at closing” document that takes all of these numbers into account. Most lenders will provide you an estimate of your closing costs when they send you their bid on funding the loan. Take a close look at those numbers and be sure you’re financially in a position to make the purchase. And remember your negotiating options, too!

Remember you'll need homeowners insurance at closing

While you're looking at closing costs and estimating taxes, make sure that you have a homeowners insurance policy in place to protect your new home. With American Family Insurance, our agents can help you build a customized policy — and that can translate into real peace of mind when it's time to close on the home of your dreams.

This article is for informational purposes only and based on information that is widely available. This information does not, and is not intended to, constitute legal or financial advice. You should contact a professional for advice specific to your situation.