Who pays property taxes?
In a typical real estate transaction, the buyer and seller pay both property taxes, which are due upon completion. Who should pay real estate taxes in the first year when buying a home? Common sense tells us that the seller should pay taxes from the start of the property tax year until the date it was closed. The buyer should pay the property taxes due upon completion. In this way, buyers and sellers only pay the property taxes that are incurred during the time they actually owned the property.
People who own real estate must pay property taxes. The government uses the money these taxes generate to pay for schools, public services, libraries, roads, parks, and the like. Typically, the tax amount is based on the estimated value of a property. If you have a mortgage on your home, the loan service provider can collect money from you as part of the monthly mortgage payment to pay property taxes later.
The servicer pays taxes on behalf of the homeowner through an escrow account. However, if taxes are not collected and paid through such an account, the homeowner will have to pay them directly. A lien is a claim against your home to ensure that you pay the debt. As a result, the property effectively acts as security for debts. Any of these unfair outcomes can be easily avoided by ensuring that the purchase agreement properly prorates property taxes between buyer and seller and requires both to pay their share.
Some lenders may even offer to lower your interest rate if you pay your property taxes through an escrow account. While some homeowners prefer to pay property taxes themselves, including your tax payment in your mortgage payment can help you avoid spending large amounts of money to tax collectors once or twice a year. The lender puts this money aside in a separate account (often called an escrow account) and uses it to pay Jim and Pam’s property taxes to the local government when they’re due. Forfeiture sales are when no one bids on sale, so the lien for taxes goes to the state and then someone buys the expired lien from the district.
When it comes to buying a home, Dave recommends that your monthly mortgage payment — including property taxes — shouldn’t be more than 25% of your take-home salary. Taxes on tangible property tend to decrease from year to year as the value of the property falls. Being able to afford the taxes is important, but it’s also important that they cover the amenities you expect from your neighborhood. Each month, you’ll need to pay approximately one twelfth of the estimated annual cost of property taxes and possibly other expenses such as insurance along with your usual monthly payment of principal and interest.
For tax purposes, the IRS automatically treats the seller as if they had paid property taxes by the sale date and the buyer paid the taxes due after the sale date. If you pay property taxes along with your mortgage payment, your lender pays your property tax payment into an escrow (or seized) account. This money is deposited into an escrow account and the lender uses that account to pay the taxes for you when they are due. In many states, the homeowner can redeem the home after a tax sale by paying the buyer the amount paid (or by paying the taxes owed) plus interest from the tax sale within a limited period of time.
That’s why not paying property taxes is considered a default, so your lender can foreclose your property.