Real Estate Closing 101 - Tax Adjustments

Tax adjustments at a real estate closing can mystify some home buyers, even though they are fairly straightforward. The part that is often confusing is the terminology used and the way it is explained. So let's clear these things up a bit.

Actually, there are several adjustments that take place during the real estate closing, but in this article we will focus on the ones that affect the home buyer.

Property taxes in virtually every county in the United States are paid at specific intervals. In many counties, you will pay them twice per year, or every six months. They are paid in advance, meaning that you are paying for the next six months, rather than the six months that just past.

Because property taxes are paid in advance, the existing owner of a home will have paid a certain portion of them when you agree to buy the home. Because of this, a tax adjustment is usually made. Basically, you are paying the seller back for the payments they have made on (what will be) your behalf after the closing.

To keep it simple, let's assume that property taxes are paid in January of every year in the sum of $2,400. That bill of $2,400 covers the six-month period of January to June. On July 1 every year, a tax bill of $2,400 is owed, which covers the six-month period of July to December each year. The annual taxes therefore are $4,800.

The 6-month payment of $2,400.00 means that the monthly tax bill on the property is $400.00 per month, which is generally prorated to a daily fee based on 30 days per month (even though every month does not have 30 days, most real estate professionals use that as the basis for determining a per diem rate). In this scenario, the $400 per month bill is equivalent to a per diem rate of $13.33.

At the real estate closing, the adjustment will be based on how many months and days of taxes have been prepaid. For every month prepaid you will owe the seller $400. So for every day over the whole months you will owe $13.33 per day.