How are property taxes adjusted when you buy a home?
When buying or selling a property, a portion of the annual property tax will be factored into the amount that you are paying or receiving, called the property tax adjustment.
Property tax adjustments are for the purpose of ensuring that the buyer and seller are only paying for the property taxes for the time that they own the property. Real estate purchase contracts include clauses that note that property taxes will be adjusted to credit the buyer or seller, to ensure that the parties are aware.
Property taxes are calculated according to the Adjustment Date, which may or may not be the same as the possession date. The Adjustment Date is when the buyer begins to assume responsibility for the property taxes.
The City does not adjust taxes between the seller and buyer. This is done by the lawyers on the closing of the real estate transaction.
When calculating the adjustment, the first thing to understand is that taxes are assessed for the period of Jan 1 to Dec 31 of each year. This means that, for example, 2019 taxes are for the period of Jan 1, 2019 to Dec 31, 2019. (Note: This is the period used by the City of Edmonton and surrounding municipalities – not all municipalities use this assessment period.)
Paying Property Taxes
There are three ways to pay property taxes:
- Through a lump sum payment to the city,
- Through monthly payments to the city, or
- Through monthly payments with the mortgage payment.
Lump Sum Payment to the City
If you pay the City annually through a lump sum payment, the payment is due June 30th of the assessment year. The payment is for the period of January 1st to December 31st of the assessment year.
Monthly Payments to the City
If you pay the City monthly, your payments start in January and end in December for the assessment period.
You can sign up for monthly payments online. When charged monthly by the city, for the first 6 months of the year you will be charged according to the property tax amount of the previous year. For the next 6 months, the amount is adjusted to reflect the current tax amount.
For City of Edmonton enrollment information click here https://www.edmonton.ca/residential_neighbourhoods/property_tax_assessment/monthly-payment-plan.aspx
Choosing monthly payments directly to the city are a good way to avoid incurring late payment penalties because the property tax is automatically withdrawn from your bank account each month.
With your Mortgage Payments
If you pay your property tax with your mortgage payments, the lender collects a tax amount with your regular mortgage payment. The tax payment is calculated using the yearly estimated tax levy divided by the number of mortgage payments due during one mortgage year.
The tax payment is allocated to a tax account attached to your mortgage. Taxes will be paid from the tax account when taxes are due by the mortgage lender. Taxes are due in the middle of the year – June 30.
This means that the lender has to collect for 6 months into the previous year in order to have collected 1 full year worth of taxes by the time taxes are due. I.e. To pay the City the total taxes due June 2020, the lender starts collecting in June 2019.
Example #1 – Closing Date/Adjustment Date is May 1, 2019
In this example, property taxes are paid annually. The property tax for this year has not been paid by the seller because they are not due until June 30, 2019 for the period of Jan 1, 2019 to Dec 31, 2019.
On closing, the seller provides a credit to the buyer (amount deducted from the purchase price) for their share of the taxes being Jan 1, 2019 to May 1, 2019. The buyer is then responsible for paying the total 2019 property tax when due.
If the annual tax is $10,000, the seller provides a deduction to the purchase price of $3,278.69*.
*$10,000 / 366 days in 2019 = 27.32 * 120 days of seller ownership (Jan 1 to May 1) = 3,278.69
Example #2 – Closing Date/Adjustment Date is August 1, 2019
In this example, property taxes are paid annually. Property taxes were paid by the seller when due on June 30, 2019 for the period of Jan 1, 2019 to Dec 31, 2019.
On closing, the buyer provides a credit to the seller (amount added to the purchase price) for their share of the taxes being Aug 1, 2019 to Dec 31, 2019.
If the annual tax is $10,000, the buyer provides a credit of $4,180.33*.
*$10,000 / 366 days in 2019 = 27.32 * 153 days of buyer ownership (Aug 1 to Dec 31) = 4,180.33
Example # 3 – Seller pays taxes monthly to the City – Closing Date is June 1, 2019
Here the amount of tax that the seller is responsible for is calculated (Jan 1 to June 1) and adjusted against the actual amount of taxes that the seller has paid to the City for the current year. As stated earlier, when the owner pays the property tax monthly to the city, for the first six months, the buyer is charged according to the property tax amount of the previous year and for the remaining six months, the value of the tax is adjusted to reflect the present year’s tax amount.
If the closing date is June 1st, the seller has paid $1,250 towards the 2019 property tax, as the value of the property tax was $2,500 in the previous year. However, the seller’s actual share of the 2019 tax for January 1st to June 1st is $1,041.00. In this case, the seller has overpaid the City by $208.90 for their share. On closing the buyer must pay the seller $208.90. The buyer is then responsible for the payment of the balance of the 2019 property tax.
Real Estate is all we do and we’ve been explaining property tax adjustments for years to our clients. We know it can be confusing so please call to speak to our Real Estate Lawyer who can clarify the adjustment for your particular property closing.
This article is provided for general information purposes only and does not constitute legal or other professional advice. You are advised to contact a Real Estate Lawyer regarding any specific legal issues. You may reach us at 780-473-7779.