Post-Closing Tax Bill for Newly Constructed Residence

 

 

Most individuals need to obtain a mortgage in order to finance the purchase of a home.  Typically, the monthly mortgage payments will include one twelfth of a homeowner’s real property and school district taxes.  To provide for the payment of real property taxes and school taxes during the first year, the lender will require the homeowner to escrow a certain amount for the payment of these taxes.  Thereafter, if there are any increases in a homeowner’s real property tax and/or school tax from one tax year to another, then the homeowner’s monthly mortgage payments will be increased to take into account the tax increase.  As a result, after escrowing money for the payment of taxes at closing, a homeowner does not expect to pay a tax bill directly until his or her mortgage is paid off.

                Thus, it may come as a shock to homeowners who purchased a newly constructed home (in other words, directly from the builder) when he or she receives an interim tax bill which will not be paid out of the monies that the homeowner escrowed at closing.  The interim tax bill represents the assessment of a homeowner’s house for the balance of the existing tax period (which begins on the date of closing).  Property taxes assessed by counties and local municipalities generally run on a calendar year (i.e. from January 1 through December 31).  School district tax bills, on the other hand, typically run from July 1 through June 30 of the following year.

                Prior to closing, the builder had been paying taxes based on assessments for raw land only.  As part of the closing costs, the buyer will reimburse the builder the balance of taxes that the builder has paid on the raw land for the current tax year on a pro-rata basis.  For example, if closing occurs on September 30, 2005, the buyer will reimburse the builder for 2005 county and township taxes in an amount equal to 75% of the total taxes paid (as the tax year runs from January 1, 2005 through December 31, 2005).  With respect to school taxes, the buyer will reimburse the builder for 2005-2006 school district taxes in an amount equal to 25% of the total taxes paid (as the school district tax year runs from July 1, 2005 through June 30, 2006).

                Several weeks after the homeowner’s deed has been recorded (which, depending upon the county, may take up to 6 to 9 months) and the Board of Assessments of the county where the house is located has been notified that a new house now exists on the previously vacant lot, the homeowner will receive a written notice from the Board of Assessments stating the combined assessment of the lot and the house.  Thereafter, the homeowner will receive an interim tax bill, which represents the assessment of a homeowner’s house for the balance of the existing tax period.  The reason that this bill represents the assessment of only the new home is that the builder has already paid taxes on the raw land (for which, the homeowner reimbursed the builder at closing).

                 Federal regulations govern the amount of funds that may be collected to set up escrow.  As a result, lenders typically do not escrow for interim taxes.  Unless the lender specifically advises the homeowner that the escrowed monies will be used to pay interim taxes, then a homeowner will be responsible for their payment.  Therefore, when an individual purchases a newly constructed home, he or she should budget for interim taxes.

 

— Andrew Berenson

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