Property taxes are fees paid to local governments that fund things like schools, road upkeep, and water/sewer lines. Home sellers and buyers pay real estate transfer taxes when they sell or buy a new home.
According to Canadian Choice House Buyer, if you don’t pay property taxes, the government can put a lien on your home. So, when you sell your house, who pays the property taxes?
Property taxes are fees paid to state, county, and local authorities for municipal services like public schools, road upkeep, and water/sewer line maintenance, among many others. When it comes time to sell a home, property tax is important for both the seller and buyer to consider, as these taxes are included in closing costs. When selling a home, the total amount of taxes that will be paid can vary considerably based on numerous factors, including the number of years the seller has owned and lived in the property and whether the property is a primary or investment property.
When it comes to property taxes, New York has some unique rules that can make things tricky. Generally speaking, the seller will be required to pay a portion of the property taxes that have accrued up through the sale date, with the remaining balance being paid by the buyer. This is done via prorating, which ensures that both parties are paying only for the time they occupied the property.
In a typical home sale in New York, the seller will also be responsible for paying real estate transfer base taxes (RPTT), a 1% tax on the initial sales price of the property. In addition, the seller will be responsible for any homeowner’s association fees, settlement or attorney fees, property appraisal fees, mortgage payoff, and/or prepayment penalties. The buyer will typically cover the owner’s title insurance and recording fees.
The good news is that if the seller has back property taxes owed, they can be paid using funds from the home sale at closing. However, this can be tricky as most home buyers will not want to purchase a home with a lien and back property taxes owed.
If you find yourself in this situation, your best option may be to sell the property as-is to a cash buyer, such as Leave the Key Homebuyers. This will allow you to close on the property without having to wait for the lien and back property taxes to be paid.
When it comes to selling a house, there are several tax issues you need to consider. For example, you need to know whether or not you’ll have to pay property taxes and how much you might owe. In addition, you’ll need to understand the tax exclusions that might apply to your situation.
Capital gains taxes are levied on the profit you make from selling a house. The amount you owe depends on your tax bracket and the money you made from the sale. The IRS also takes into account any expenses you incurred for the home during your ownership, such as remodeling, renovations, or repairs. These expenses can decrease your taxable profit, but only if considered “capital improvements” and not ordinary repairs or maintenance.
The seller pays a property transfer tax at closing when you sell your home. The amount of this fee varies by state, and some places don’t charge it at all. Generally, you pay a percentage of your home’s purchase price for this tax. The buyer then reimburses the seller for a portion of their property taxes for the rest of the year after the sale.
Typically, sellers pay prorated property taxes at closing, calculated based on what they paid at the time of the sale. This is a common practice in real estate transactions. During the closing process, your lender or escrow agent will include a line item on the mortgage settlement statement that shows the prorated property taxes you owed.
The federal government imposes capital gains taxes when you sell your house but doesn’t tax your primary residence. However, you’ll have to pay taxes if you sell a vacation home, rental home, or other investment property. In addition, if you inherited a property from your parents, the IRS doesn’t exempt you from paying capital gains taxes. In order to qualify for the homeowner’s exemption, you must have owned and used the property as your primary residence for at least two years before selling it. If you sold it because of a job transfer, divorce, or death, you may be able to exclude some of the gain.
If real estate taxes aren’t paid by the end of the year, they become delinquent and are turned over to the local municipality’s tax collector. At this point, the property becomes a “tax claim.” If it remains unpaid after a certain period, typically 5 years for residential properties and 3 years for commercial properties, the taxpayer will receive a notice of impending tax sale, also published in a local newspaper. Upon becoming absolute, the tax claim becomes an unenforceable lien and may be sold at auction for unpaid taxes, penalties, interest, and fees.
Once the municipal tax agency sells a tax lien, it doesn’t acquire title to the property. Instead, the new owner pays the amount of the delinquent municipal charges owed. As a result, if you are selling your home and still have delinquent taxes, the sales process can be more complicated because it isn’t as easy to use the sale proceeds to pay off your mortgage and the property tax.
Generally, the seller’s and buyer’s shares of real estate taxes are pro-rated based on the number of days each owns the property during the calendar year of closing. For example, Bill purchases Sandra’s house with a closing date on September 1, and she owned it for 122 days that year. Bill and Sandra would each have to pay their share of the property taxes, which in this case would be a combined total of $300.
But sometimes private entities get involved, and a property tax debt can quickly eclipse any equity you’ve built up in your home. This is especially true if your city or county holds a tax sale and creates a “tax certificate.” This is basically an unenforceable claim to your home that investors can sell. If you cannot pay your back taxes, they can foreclose on the property to recover their investment. If lucky, New York law allows you to redeem your home from a tax sale and maintain ownership.
Taxes at Closing
In addition to real estate transfer and property taxes, other closing costs must be paid at the time of sale. These include an attorney fee, a title search charge, and a closing fee. The lender will provide a closing estimate document that includes these fees and other expenses. If the total cost of selling the home does not add up to the amount of money that is owed on the mortgage and the outstanding property tax, the sale will not be able to close.
The way that the buyer’s share of property taxes is calculated depends on the area in which the house is located. Many areas conduct appraisals to find out the market value of homes. Then they take a certain percentage of this value to come up with the assessed value, the amount used to calculate property taxes. These ratios vary greatly across the country.
At closing, the buyer and seller agree on a number representing their share of property taxes for the year they are selling the home. The lender, closing attorney, or escrow agent will include this amount among the other line items on the mortgage settlement statement.
Real estate transfer taxes are a one-time fee levied on the sale of a home by the state, county, or city. These fees generate revenue for the local government but are not negotiable.
The tax amount varies by area, but the formula is generally the same. It is a percentage of the final sales price of the home. Some areas also impose additional transfer fees on selling commercial real estate or a very expensive home.
Closing fees are not always tax-deductible, and it is best to consult a financial advisor about how these costs affect your overall tax situation. Common closing costs not tax-deductible include loan origination fees, attorney fees, and real estate transfer taxes. However, the IRS does allow for deductions on a limited number of closing fees, such as the title search and insurance premium.