While the exact terms of a real estate contract determine who pays for what at closing, most transactions follow a similar pattern. When the ownership of the property changes hands, the responsibility for it does, too. This means that the seller pays the property taxes up to the closing and the buyer pays them from the closing forward.
As a part of the closing, the escrow officer allocates all of the expenses for the property between the buyer and the seller. The allocation includes the purchase price, the loan pay offs and all of the closing costs. Closers also pro-rate the property's expenses, like property taxes. While the money that changes hands at the closing might not be directly sent to the taxing authority, it does go to whomever must be reimbursed for the money they've spent or will spend for the other party's benefit.
When Sellers Overpay
If a seller ends up paying property taxes beyond the closing date, the buyer will give money to the seller to reimburse him at the closing. For example, consider a property that closes on April 1, after the seller made a March 1 payment for property taxes spanning the period from Jan. 1 through June 30. While the seller paid for six months of property taxes, he will only have spent three months of that period in the house. To prevent the buyer from getting three months of free property taxes, the closer will set up the settlement statement to require that the buyer pay the seller the equivalent of three months' worth of property taxes -- roughly one-half of the bill. This way, the taxing authority gets its money from the seller, the seller gets his money back from the buyer, and the buyer pays the property taxes for the period that she lives in the home.
When Sellers Underpay
If a seller sells the property before she has paid her property taxes, the opposite happens. Assuming that the property sells on Feb. 1 and that the March 1 payment covers the first six months of the year, the buyer would pay it. However, the seller will have lived in the house for the entire month of January, tax-free. In that instance, the closer would have the seller pay the buyer one-sixth of the property tax bill so that the buyer could use that money along with her own funds to pay the entire bill for the six months.
Mortgage Escrow Accounts
While a mortgage escrow account pays the property tax bills, it doesn't affect how the responsibility for the bill gets allocated at closing. Just because a seller has extra money in his escrow account doesn't mean that he's responsible for paying the property taxes. Any extra money that's left over in the escrow account will go back to the seller. It works this way with the buyer, as well. If the buyer has an escrow account and funds it to pay the property taxes, the seller's share of the property taxes will still be prorated to her at the closing.
- Realtor.com: Sharing Closing Costs
- Crye-Leike Real Estate Services: Explanation of HUD-1 Settlement Sheet
- The Heritage Escrow Company: Understanding Property Tax Prorations
- Realtor.com: Understanding Escrow Accounts
- California Association of Realtors. "Contingency for Sale of Buyer's Property." Accessed June 1, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.