(Kerrie) We have talked a lot about liens and how they affect title. What about the lien for county taxes and assessments? There seems to be a lot of confusion about these.

(Jim) The lien for county taxes and assessments comes from the state statutes. It is always there and has no expiration. This lien takes priority over any other liens or encumbrances against the property. The confusion about these taxes stems from the fact that they are paid twice a year in arrears.

(Kerrie) Taking that into consideration, then a purchase contract should always include a provision to deal with the taxes and assessments. The standard Realtor contract contains a clause that states that the taxes and assessments shall be prorated to date of closing. So, enough said.

(Jim) Surely you jest? To explain all of this, we should start at the beginning.

(Kerrie) Not in feudal England again?

(Jim) For once – no. Per statute, taxes and assessments are billed twice a year in Ohio. The taxes reflect the owner, the status and the value of the property as of January 1 of the year of the tax bill. The first tax bill for the year is referred to as the “December” bill and it is the charge for the taxes for the first half of that year. The December 2004 tax bill would be for the period beginning January 1, 2004 through June 30, 2004.

The “June” bill is for the second half of the previous year. The taxes for the period beginning July 1, 2004 through December 31, 2004 would be billed in the June 2005 tax bill. This is not confusing at all.

(Kerrie) So if we just paid our June 2004 tax bill, we paid for the last half of 2003, or July 1 through December 31, 2003. Right?

(Jim) That’s right.

(Kerrie) So when the purchase contract requires that the taxes be prorated to date of closing, how is that calculated?

(Jim) It depends.

(Kerrie) Don’t give me some lawyer answer. Tell me the calculation.

(Jim) Well, the common method to calculate the tax proration in Greater Cincinnati area is to start with the last tax bill that was paid. Determine what tax period that bill paid. Then count the number of days that have elapsed since the last day of the tax period for that tax bill to the date of the closing. For example, if the closing is to take place on July 6, 2004, we check the title and note that the last tax bill paid was the June 2004 bill. That paid the taxes through December 31, 2003. The number of days from that date to the closing would be 188 (January 1 through July 6). We then take the amount of the taxes for the year and divide by 365 (or 366 in a leap year). This gives us a per diem amount. That amount is then multiplied by the number of days. The result is taken against the seller as a charge on the settlement statement and given to the buyer as a credit on the settlement statement.

(Kerrie) Explain again why the seller is giving the buyer a credit.

(Jim) Since the taxes are billed in arrears, the buyer’s first tax bill will be for a period of time when the seller owned the property. Buyers generally don’t like this. The proration credit is the seller giving the buyer the money to pay that tax bill when the bill comes out.

(Kerrie) That doesn’t sound all that complicated. Why all of the fuss?

(Jim) Well there are several problems with the system. For example, the actual taxes for the year of the closing generally cannot be determined with any exactness. The taxes for the year are assessed as of January 1 of the year. These taxes will include any additional taxes that may have been voted on in November of the same year. So we really do not find out what the taxes are for the year until late December of that year or early January or sometimes even February of the following year.

(Kerrie) That’s why the standard Realtor contract calls for the tax proration to be based upon the most recent information available. We really do not know what the taxes for the current year will be.

(Jim) This can really be a problem with new construction. If on January 1 of the year, the property was a vacant lot, the taxes will reflect a land only value. If it was farmland that was later subdivided, then the taxes for the individual lots would not show up on the tax records until January 1 of the following year. The taxes for the lot would be billed in December of that year. If a new house has been constructed on that lot, the tax bill may not reflect the construction for quite some time. At the time of the closing, the only available tax information was for land only taxes. Buyers get very upset when they get the tax bill that includes the house when their tax proration was based on land only.

(Kerrie) Sounds like something that the buyer’s agent should have taken into consideration when advising the buyer in making the offer.

(Jim) Of course. There is another glitch that can be thrown into the works as Greater Cincinnati spreads north and Greater Dayton spreads south.

(Kerrie) Why is that? Not England, again?

(Jim) No. The Dayton area uses a “short” proration method. This method treats the most recently paid tax bill as being for the most current period. For example, the June 2004 tax bill is treated as if it paid the taxes through June 2004. So in the example above, rather than starting with January 1, 2004, they start counting days from July 1, 2004. The result is 6 days rather than 188. A much smaller credit is given to the buyer.

(Kerrie) That doesn’t seem fair.

(Jim) It is fair – as long as everyone in the system is using the same method – meaning all buyers and sellers.

(Kerrie) So the point is that the agents need to be diligent in making sure that the right proration method is identified in the contract. The seller could be anticipating a “short” proration and the buyer could be anticipating a “long” proration. There could be a dispute as to which method to use. One of the parties will usually ask their agent to make up the shortfall for not giving them good advice.

(Jim) Speaking of good advice, did you know that there are some other potential traps in the standard contract with respect to assessments?

(Kerrie) I’m sure that there are, but my brain can’t handle any more. I think we should save that for the next article, but that’s just my opinion.

(Jim) And mine.

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Jim and Kerrie Matre are married partners in the law firm of Matre & Matre Co., LPA. The firm generally limits its representation and practice to all legal issues related to real estate, construction law and corporate representation.

This article is written to introduce the reader to common real estate legal concepts. It is not intended to be legal advice to any specific party. As always, consult your attorney regarding your specific situation.

Have questions? Email them at either kmatre@matrelaw.com or jmatre@matrelaw.com