Welcome back! In Part 1 of “Tax Prorations Explained for Florida Real Estate Closings” we looked at WHY we prorate taxes and the contractual rules by which we typically prorate. Now let’s look at how to understand how those prorations work.
Cont’d. 3. Which accounting period is used?
Florida real estate taxes often include different types of taxes and assessments. For example, we have ad valorem taxes, which are based on the appraised value of the real property; and, we have non-ad valorem taxes, which are based on other elements. These taxes and assessments are sometimes assessed by their taxing authorities on different accounting periods. Some use the calendar year while others use a fiscal calendar.
This is where things can begin to get understandably confusing. When we prorate, we must use the proper accounting period for each tax and assessment. In the example above, ad valorem taxes are assessed on the calendar year – from January 1 through December 31. And the Lee County Solid Waste Assessment, as you see below, is assessed on a fiscal calendar from October 1 through Septmeber 30. In our experience, taxing authorities who use a fiscal calendar for accounting typically use October 1 through September 30. You should take note here that the typical fiscal calendar uses an end date that could extend into the year after your closing.
Irrespective of the accounting periods, all of these taxes are payable with your current year’s tax bill. In Florida, taxes for the current year are due and become a lien on real property on November 1. Make sense? If not, please let us know! So, knowing the taxing authority’s accounting period for a given tax or assessment is an integral part of getting your prorations right.
4. When is your closing date?
Remember when we talked about the contractual provision that prescribes how we are to prorate taxes at closing? It says that taxes and assessments shall be prorated “as of the day before Closing.” This is of course important because it tells us the “through date” for the prorations. Simple enough. If you have used the standard form FAR form and your closing is on October 29, 2015, the prorations made at closing would be made through October 28.
5. What is the amount of the assessment to be prorated?
Our contract says that we must use the actual tax or assessment; or, if that amount cannot be determined, we must use the amount from the preceding year as an estimate. To determine the right amount, we have to use both the accounting period and closing date. We can make some generalizations based on what we’ve discussed so far.
If your closing is between January 1 and September 30, you would estimate the amount of the ad valorem taxes (calendar year) based on the preceding year’s amount; and, you would be able to use the actual amount for any non-ad valorem assessments accounted for on a fiscal calendar.
If your closing is between October 1 and October 31, you would estimate the amount of all taxes and assessments based on the preceding year’s amount.
And if your closing is between November 1 and December 31, you would be able to determine the exact amount of all taxes and assessment by reviewing the current year’s tax bill.
6. Are the assessments paid or unpaid at closing?
This is another crucial question which we must answer in order to prorate properly at closing. If the assessments have been PAID by the owner/seller at or prior to the closing, then the seller will receive a credit from the buyer for days during which the buyer will have owned the property but for which the seller had paid. On the other hand, when an assessment or tax has NOT BEEN PAID at or prior to closing, the buyer will receive a credit from the owner/seller for the days during which the seller owned the property but for which the buyer will pay in the future.
7. Calculating tax prorations for closing.
Have a headache yet? Thought so. Hopefully this will simplify things for you. The image below is a screenshot of our title processing software’s proration section. It should provide a clear example of how our system does the math based on the variables we’ve discussed thus far. Let’s explore a little using our must-ask questions.
What accounting period is used?
See the “time period” column? That is the accounting period. Here, we’re dealing with two periods – Jan – Dec & Oct -Sep. See that?
What is your closing date?
The closing date is reflected in the “thru” column. Here, that’s Oct. 28, 2015; and, that will be the date through which our prorations are made. The “time period” and “thru” date result in the “days” which will be prorated.
What is the amount of the assessment/tax to be prorated?
The total amount, not surprisingly, is located in the “Total” column.
Are the assessment paid or unpaid at closing?
Important question! You’ll see two sections in our software with the blue headers – a section for “Items Paid by Seller in Advance . . .” and a section for “Items Not Paid by Seller . . . .” With our closing date of October 28th, it so happens that ALL of the applicable taxes and assessments are NOT PAID at closing; therefore, the seller will credit the buyer the amounts in the last column – “Proration.”
Let’s look at the 2015 Ad Valorem taxes in detail. The actual amount of the taxes is $4,779.65; the taxes are assessed on a calendar year from Jan through Dec (365 days). Based on those numbers, getting the per diem (i.e., the per day amount) for our calculations is easy – divide $4,779.65 by 365 = $13.0949/day. Luckily, the system counts the number of days from Jan 1 through Oct 28 – 301. So, 301 times $13.0949 = $3,941.57 (rounded). So . . . the seller will credit the buyer that amount on the settlement statement at closing.
Make sense? We sure do hope so. We also know that this is a lot of information. If you have questions about your taxes and prorations at closing, please don’t hesitate to call us at 239-985-4142 or contact us online. Until next time!