ACT 185 Tax Adjustment Program

Trying to Understand Act 185 Tax Adjustment Program as it affects the sale of property

 1) The Act 185 Tax Adjustment Program  (formerly know as the Property Tax Prebate) is an Income Tax benefit based on the Sellers previous years Income Tax Filing.  If the Seller qualifies for this Prebate then the Seller (not the Buyer) should ultimately be the beneficiary. 

2). Recent legislation has declared that any Prebate money the Tax Payer (seller) is entitled to is sent to the Town (not returned to the Tax Payer/Seller) and applied as a credit to the next year's property taxes.  The tax adjustment is intended to benefit that tax payer without actually returning money directly to them  -  if the property has been sold in the interim that money ends up going as credit to the new owners property taxes and does not go to the benefit of the entitled Tax Payer/Seller so logically there should be an exchange from Buyer to Seller to ensure that the correct taxpayer gets the benefit of the tax rebate.

3).   In general there is a processing time delay between the normal tax filing deadline (April 15) and the date the confirmed amount of any Tax Payer's entitlement is actually processed and sent to the towns (generally July 1).   f Sellers file income taxes late, after April 15, by Extension this delay in verifying the amount of the credit can be extended to as late as Sept 15.

4)  If closing occurs after the State sends the Prebate Money to the Town ( generally after July 1) everyone knows exactly how much of the Seller's money goes to the Buyers next property tax bill so it can easily be identified and adjusted for at closing so there is no need for an escrow .  The amount of the proration will be a closing cost to the Buyer.

 BUT:

5)  If the closing occurs within that processing time frame after April 1 (for the seller to be qualified as resident) and before the Prebate money actually gets to the Town and can be verified (generally July 1) the amount that should rightfully be returned to the Seller can only be Estimated.     (Attorneys and Accountants have those forms and can make estimates along with other prorations based on adjusted gross income information provided by the sellers.)  The Seller and Buyer can agree to simply trust each other to make an adjustment later but in order to be reasonably sure that the money intended to benefit the Seller will be available once the actual Prebate amount is verified by the Town it may be considered appropriate to place an estimated amount in an escrow account at time of closing from the Buyer.   When the Tax Adjustment is credited to lower the new owners property tax bill a matching amount is released from the escrow to pay back the Sellers.  Any remaining funds in the escrow are returned to the Buyer.

If you have any questions or concerns regarding this topic please consult your attorney and/or tax consultant.