Buyers, sellers, investors, welcome back to another installment of Real Estate Jargon, aka, simple explanations of real estate terms not normally found in nature.
Today we’re going to talk about supplemental taxes in California, that little surprise bill that homeowners receive months after buying a property. In short, supplemental taxes are the difference between the amount of property tax that has been pre-paid prior to a sale and the amount of additional tax that is due after a sale because of the higher assessed value (usually the sale price). Confusing? Most people think so. Here is a simple illustration.
Joan bought a house a few years ago for $100,000. The tax rate in her area is 1.2%, so her annual tax is $1,200. In April, she paid her property tax for the period April through December.
A key concept to keep in mind is that property taxes are usually pre-paid.
In June, Joan sells the house to Ed for $200,000. Because the assessed value of the house is now twice what it was when Joan owned it, Ed has to pay twice the tax from the day escrow closed until the next payment is due in December. Joan has pre-paid $600 for that period, but Ed now owes $1,200 for that period. The additional amount Ed owes is the amount of the supplemental tax. How the supplemental tax actually gets paid can be confusing, but please read on…
Joan doesn't get a refund from the county for the amount of tax she's pre-paid when she sells. The county keeps her payment and she is reimbursed for that amount by the buyer (Ed). In the escrow process, Ed reimburses Joan for the taxes she pre-paid from June through December ($600) by depositing a check with escrow that covers closings costs and the pre-paid taxes. Escrow closes, Ed moves in, his wife redecorates. Life is good. But the additional tax due has not yet bee paid.
Rather than collecting the $600 supplemental tax from Ed at close of escrow, the county sends out a separate bill months later. In many counties, they mail supplemental tax bills to new homeowners around March/April for sales that closed in the previous calendar year.
Supplemental tax bills often confuse new homeowners for two reasons: 1) their agent didn’t do a good job of explaining to them what I explained above and/or 2) the supplemental bill arrives in the mail near the time the April payment is due, causing the homeowner to wonder if this is an alternate bill or an additional bill.
Why doesn’t the county just collect the supplemental tax at close of escrow, since the tax rate and new property value are known at that time and taxes are supposed to be paid in advance? It’s one of the great mysteries of government operating procedures. Of all the explanations I’ve heard, the one that comes closest to being believable was shared with me by a retiree from the county assessor’s office: “Sure, a system could very easily be put in place so that supplemental taxes could be paid through escrow at closing, but then the county would have to lay off union workers who prepare and process the supplemental tax bills.”
If you have questions about real estate jargon or buy/sell/investment strategies, drop me a line! john@jsrealproperty.com
NOTE: For those outside California, I should explain that property taxes are paid in December and April here. I’ve managed rental properties in Hawaii (paid every 6 months) and Nevada (paid every 3 months), so I know every state has its own schedule. Thanks for bearing with me on my California-oriented illustration.
John A. Souerbry & Associates (DRE 01370983) www.jsrealproperty.com
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