Will You Have to Pay Taxes When You Buy a House?
When you buy a home, in addition to the down payment and closing costs, you probably will see an item on your closing documents for taxes. Exactly how much of a bill for taxes will depend on your contract and the date of your closing.
Prorated Property Taxes
Houses are sold Monday through Friday (and sometimes on weekends) throughout the year. However, property taxes are billed on a fiscal year schedule, which may or may not coincide with the calendar year. In some jurisdictions, taxes are paid in installments. For instance, in Montgomery County MD, annual tax bills and the first installment of semi-annual bills are due on or before September 30th and become delinquent on October 1st. The second semi-annual installment is due December 31st and becomes delinquent January 1st.Depending on when you close, the seller may have already paid taxes for a future portion of the year when he or she will no longer own the house, or the seller may not have paid all the taxes due through the time when he or she will move out. That issue needs to be addressed at closing.
If you purchase a house and the seller has already paid taxes for a period that extends beyond the closing date, he or she has paid for time when you’ll own the house. The contracts used here in the DC Metro area (GCAAR, MAR and NVAR) require you to reimburse the seller for the portion of the taxes which the seller has already paid and cover the time when you’ll own the house.
If the seller hasn’t yet received or paid the tax bill that covers a portion of the year when the seller lived in the house, the title company will deduct that prorated share of the tax bill from the seller's net proceeds to pay the tax bill that is due. The seller must convey clear title to the buyer and unpaid taxes would result in a lien on the property and an inability to get title insurance.
Unpaid Back Taxes
You protect yourself from becoming for unpaid back taxes by using a reputable Realtor, a legitimate title company and by obtaining a title insurance policy. Before you close on the house, the title company will research the title of the property and check to make sure that the seller is current on property taxes and determine whethere there are any outstanding liens on the property - such as one filed by the IRS for unpaid Federal taxes. After the title company determines that there is clear title - i.e. there are no unpaid taxes and the seller has the right to sell the property, the title company will provide you with a title commitment or title report saying that there is clear title. If you’re told that there are no taxes due, but you find out after closing that in fact there are, you’ll be able to file a claim against your title policy.
Understand the Tax Situation Before Closing
Homebuyers are often confronted with unanticipated expenses. Before you close on a house, make sure you know if there are any outstanding taxes and how those bills will be handled. Discuss the matter with your real estate agent and work with a reputable title insurance company to get complete and up-to-date information.
This should not be a big deal as long as you are working with professionals committed to providing you with excellent and ethical service. If you have any questions about how the property taxes will be addressed at closing or you want to make sure that you are working with a professional Realtor committed to your successful outcome , please give the Lise Howe Group - the Bethesda Condo Queen - a call at 240-401-5577. We are also delighted to refer you to several top notch and very professional title companies here in the DC metro area.