Real Estate Tax Proration Question

Real Estate Tax Proration Question:  How do I determine which method of tax proration is used for my transaction?

I have been asked many times about the proper tax proration method for a transaction, usually after a closing when a purchaser or seller believes that the method used was wrong.  There are many methods of tax proration and they differ by region in Michigan.  However, if you remember a couple of simple rules, you can lock down the proper tax proration method for each transaction.

How the tax proration method is determined:

Michigan has a statute that discusses tax proration methods.  The statute is an excerpt of the General Property Tax Act –  MCL 211.2, and it can be found here:  http://www.legislature.mi.gov/(S(jwujph45tnrp4l22qvnrwwf1))/mileg.aspx?page=getObject&objectName=mcl-211-2

Basically, if the parties to a private transaction do not agree otherwise, real estate taxes must be prorated between them as if paid in advance on a due date basis.  

Here are the rules:

  1. The buyer and seller can agree to prorate taxes using any method they want.  Review the purchase agreement and any agreements by the parties to determine what method that they have agreed to use to prorate taxes; or
  2. In the absence of any agreement by the buyer and seller, the statutory method cited in MCL 211.2 applies and the taxes must be prorated as if paid in advance on a due date basis.

Sample tax proration where there is no agreement between the parties:

Let’s say that a property located in Livonia Michigan is being sold on May 28th, 2010.  In the absence of any agreement between the parties (i.e. purchase agreement does not state otherwise), the property taxes will be prorated as if paid in advance on a due date basis. The next tax bill is due July 1st 2010 and that bill will cover summer taxes starting on July 1st 2010 through June 30th 2011. Therefore, that new bill will be the buyer’s responsibility, but the buyers will also be responsible for reimbursing the seller for the amount that the seller already paid that covers the period of time that the buyer will own the home, which is the date of the closing through June 30th, 2010. Therefore, if the total amount paid by the seller for summer taxes was $2455.13, then that amount is divided by 365 days for a per diem amount of $6.73. The per diem amount is then multiplied by the 34 days that the buyer will own the home but that the seller has already paid for (the buyer is normally charged for the day of closing), which produces a net amount due to the seller from the buyer of $228.82.

Summer Tax Prorations: $2455.13 ÷ 365 = $6.73, and $6.73 x 34 = $228.82

It’s important to keep in mind that taxes in the City of Livonia become due and payable twice a year and that property taxes are considered due when they first become a lien against the property; which is the date the tax bill is issued and not on the last date they are payable without penalty. Therefore, the same thing must be done to the winter tax bill that becomes due on December 1st of each year. Because the seller would have also paid taxes on December 1st 2009, which covers the winter tax period of December 1st 2009 through November 30th, 2010, the buyer will also reimburse the seller for winter taxes from May 28th, 2010 (the closing date) to November 30th, 2010. If the amount of the winter tax bill paid by the seller was $2177.43 then these taxes should also be prorated by taking the total amount that the seller paid and dividing it by 365 days which equals $5.97. Then multiply that daily rate by 187 days, which is the number of days the seller has already paid for but are now the buyer’s responsibility, for a total of $1116.39.

Winter tax Prorations: $2177.43 ÷ 365 = $5.97, and $5.97 x 187 = $1116.39

Lastly, add the two totals to get the final credit from the buyer to the seller at the closing of $1345.21

That’s it! 

Summary:

Other methods used for tax proration in Michigan vary by region and will be covered in a later blog which will also include examples.  Please keep in mind that the method agreed to by the parties need not match the way in which taxes are collected by the treasurer of the municipality.   Finally, always look first to what the purchaser and seller have agreed to in their purchase agreement.  If the parties are silent, the statutory method applies.  

Good luck!

Laurie Marion-Operations Manager, Reputation First Title Agency

John Shepard – Vice President/General Counsel

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