Understanding Property Taxes
What are property taxes, how are they collected, and when you’re buying or selling a home how do you know if the taxes were paid? All this and more is explained in the article below!
Property tax revenue supports public schools, county governments, special districts, municipal governments and junior colleges. All of the revenue generated by property taxes stays within the same county.
The property tax bill is based on the assessed value of the property, not the market value. The county assessor is responsible for discovering, listing, classifying and valuing all property in the county, in accordance with state laws. The assessor multiplies the home’s market value by a percentage called the assessment rate to arrive at the number on which taxes will be based. Colorado counties reassess property values every two years.
Property taxes are an expense owners will continue to pay every year for as long as the home is owned, even after the mortgage is paid off.
There are two reasons why title companies address property taxes.
For one, in Colorado, unpaid property taxes have priority over all other liens, including deeds of trust. The Mortgagee’s Title Policy the title company commits to issue insures the lender that they have a first position (in the case of a traditional purchase with a loan) lien on the property. This means all outstanding property taxes must be paid at closing.
Second, it is in the Contract to Buy and Sell and title companies are beholden to the contract. Paragraph 14 addresses the Payment of Liens and Encumbrances. It states “Unless agreed to by Buyer in writing, any amounts owed on any liens or encumbrances securing a monetary sum against the Property or Inclusions, including any governmental liens for special improvements installed as of the date of Buyer’s signature hereon, whether assessed or not, and previous years/ taxes, will be paid at or before Closing by Seller from the proceeds of this transaction or from any other source.”
Contractual Specifics
Property taxes are addressed in the Contract to Buy and Sell in four places.
8.4 – Special Taxing Districts
8.5 – Tax Certificate
14 – Payment of Liens and Encumbrances
16.1.1 – Tax Prorations
In paragraph 8.5 of the Contract to Buy and Sell, it states that a Tax Certificate for the Property listing any special taxing districts that affect the Property must be delivered to the Buyer on or before Record Title Deadline. Tax Certificates are broken into 7 sections.
The Tax Certificate will outline the following:
Certified through date
Property information – legal description and address
Owners name and assessed value
Tax status and balance due
Tax levy aka mill levy
Standard statement regarding special taxing districts
Certified exception conditions (this is the section that informs us if there are additional liens, delinquent taxes, exemptions, etc.)
How are property taxes collected?
There are two critical elements to know regarding how property taxes are collected.
For one, property taxes are paid in arrears.
Property Taxes are due and payable on January 1. Property taxes can be paid either as a lump-sum amount or in two installments.
If paid as a lump-sum, payment in full is due on April 30.
If paid in installments, the first half is due by the last day in February and the second half is due June 15.
Since property taxes are paid in arrears, title companies must collect any outstanding taxes from the prior year and prorate the current year taxes as outlined in paragraph 16.1.1 of the contract.
In order to pay outstanding taxes, the title company check two sources. The first includes online county records to verify the amount due. The second includes looking at the Tax Certificate issued by the county in which the real property is located.
With regard to the proration of taxes, Title companies will refer to paragraph 16.1.1 of the contract.
The proration calculation can be based on two options: 1) Taxes for the Calendar Year Immediately Preceding Closing and 2) Most Recent Mill Levy and Most Recent Assessed Value.
If the first option is marked on the contract, the amount on the tax certificate is used for the proration of taxes. For example, one would divide the property tax amount by the number of days in the year and multiply that by the number of days the seller owned the property. This proration is a debit / credit on the settlement statement.
If the second option is marked on the contract, amounts can be found on the county website. Once the current assessment and mill levy is determined, the calculation is as follows: the current assessed value is multiplied by the current mill levy and then divided by the number of days of the year. This amount is then multiplied by the number of days the seller owned the property. This proration is a debit / credit on the settlement statement.
Year End Closings regarding Taxes
In December, county treasurers offices will close down. This means they stop issuing tax certificates and start working on taxes for the next calendar year. Given that the new mill levy and assessed value is not certified, the exact tax amount is unavailable until certification is complete, which is typically mid-January. With taxes due as of January 1, Title companies will escrow from the seller 125% of the most recent mill levy and assessed value until the actual tax figure is available. Once the tax amount is available, Title companies will pay the outstanding taxes and refund the difference to the seller.
New Build Taxes
New build taxes are a bit more complex. Since it is a new home, there will not be an assessed value for the property yet. Therefore, the taxes are based on vacant or partially improved land only. Title companies still handle taxes the same – by paying outstanding prior year taxes and prorating the current year.
For the proration, title companies follow the instructions outlined in the purchase contract, which is typically a non-standard builder contract. If the lender asks what the title company suggests basing the tax escrow upon, the typical answer is 1% of the purchase price.
Information sourced from www.LTGC.com.
