Illinois Tax Proration Credits in Sales Contracts
During the course of a residential closing transaction, the question inevitably comes up: What about the real estate taxes? Well, during the attorney review process, your attorney and the other attorney will typically reach a resolution of what to do with the real estate taxes. It’s helpful, however, if the buyer and seller understand how and when real estate taxes in Illinois are billed first, so that they can better understand how and why taxes are prorated at closing. For the basics on how Illinois real estate taxes are billed, please click here.
Once you’re familiar with the process, you can understand the following better: In the vast majority of residential sales contracts in Illinois, taxes that have already accrued, but are not yet billed, are credited by the seller to the purchaser at closing. This credit is typically, though not always, final. In certain circumstances, a tax reproration agreement may be used in lieu of or in addition to a credit. Please note that this blog post covers real estate tax credits as they relate to existing property only, not new construction or condominiums in the conversion process.
As a Purchaser, your goal is to make sure you are receiving enough tax monies to cover the taxes the Seller accrued on the property prior to sale. Why? Because taxes in Illinois are billed a year after they are accrued. Therefore, after closing, you will receive tax bills for a portion of time in which the Seller owned the property. For example, if you are closing in January of 2009, you will receive the entire tax bill for 2008 (two bills) after you close, in the spring and fall of 2009. On the other other hand, if you are closing in May of 2009, you will also receive two tax bills for the period of time in which the Seller owned the property — in the fall of 2009 and the spring of 2010.
Taxes typically go up every year, and many times we do not know exactly what the new tax bill will be. If your property has not received a new assessed value for the last or current tax year, then in Illinois it is typical for the Seller to credit the Purchaser 105%, and in certain circumstances up to 110%, of the last full-year tax bill available, prorated day-for-day to reflect the period of time the Seller owned the property prior to closing for which the Seller has not yet received a bill.
Here’s an illustration of how this works: Let’s say you bought an existing house in Chicago in December of 2008. That means that you will receive two tax bills for the time in which the Seller owned the property — one in February of 2009, and the next one in the fall of 2009. Since Chicago was not reassessed in 2008, you probably received a tax credit of 105% of the last full-year available tax bill, which is currently the 2007 tax bill. The rationale behind this is that since Chicago was not reassessed in 2008, your tax bill will probably not go up more than %5 from 2007. Assuming your tax proration credit was final, if the actual 2008 tax bill is less than 105% of the 2007 tax bill, that’s great — you made some money. On the other hand, if the actual 2008 tax bill is greater than 105% of the 2007 tax bill, then you are responsible for the difference.
Now let’s use a different example — Let’s say that you did not close in December of 2008. You are still buying an existing home in Chicago, but you will be closing in April of 2009. How will your tax proration credit be different? Well, first of all, you will still receive two tax bills for a period of time during which the Seller owned the property, for which you are now responsible. You will receive one such tax bill in the fall of 2009, and the other one in February of 2010. Again, 2008 was not a reassessment year for Chicago, therefore you will probably only receive a 105% credit for the second half of 2008, although you might receive a little bit more depending on the circumstances and the agreement your attorney reaches with the other attorney. 2009, on the other hand, is a reassessment year for the City of Chicago. Those taxes are completely up in the air — when you close in April of 2009, it will be too early to determine what your 2009 tax liability will be. To that end, your attorney should make sure that you receive a larger credit for January 1, 2009 through your closing date in April. If both the buyer and the seller decide that they want to resolve the issue once and for all at closing, and don’t want to revisit the issue in 2010 when the tax bill is finally available, the seller might agree to provide a larger credit to the buyer at closing — perhaps 115% – 125% of the last full-year tax bill, prorated for January – April 2009. On the other hand, it might be more prudent to enter into a tax reproration agreement at closing. For more information on what a real estate tax reproration agreement is, please click here.
Now let’s say you are buying that same home in Chicago, but in December of 2009. By the end of 2009, the new anticipated assessed value for your property will be known. Based on that assessed value, your attorney will calculate what the tax bill, and the corresponding tax credit, ought to be. Therefore you will probably receive a fairly accurate tax credit for 2009. You will receive the 2009 tax bills in the spring and fall of 2010, and your property will not be reasessed again until 2012.
Your attorney may also consider existing property tax exemptions or the status of any property tax appeals when making his or her determination about how much the tax proration credit should be. Depending on what time of year you are closing, which county you are located in, or which portion of Cook County your property is in (since a different portion of Cook County is reassessed every year), your real estate attorney will guide you as to what is the best option for you — whether you are a buyer or a seller.
Real estate tax proration credits may seem complex, but a good real estate attorney will know how to structure a proper tax credit intrinsically, and you can look to him or her for advice. While people approach real estate tax prorations differently, I feel it is important to be guided by two fundamentals: 1) What is simple and practical, given each client’s individual situation, and 2) What is fair. Remember, the goal of a real estate tax proration credit is not for the seller to try to give the buyer less than what is due to him, or for the buyer to try to get more than what he will actually need. Rather, the goal is to make sure that the taxes are paid without causing undue burden to either party.
This post was very helpful. Thank you!
Could you give a quick-and-dirty primer on how this is different for new construction? Thanks.
It’s too much information for a quick primer, but I will keep it in mind for a future blog post!
Can the lender in a (foreclosure)short sale fix tax proration at certain date before the closing date?
Yes — I have seen lenders do this when the closing is delayed, and the lender is unwilling to reduce its payoff by the additional tax credits owed as a result of the delay in closing.
Great blog! In the next update can you mention what happens if they have BOTH property tax 105% calc AND a reproration clause? And if 6 months later discover seller had unearned exemptions during that calc?
Hi Erin,
If you have both a 105% proration at closing and a tax reproration agreement, you have to look at the terms of your tax reproration agreement to see what happens. It really depends what the agreement was between the parties. Typically the taxes are reprorated exactly, which means if the buyer was over-credited at closing, the buyer has to pay the seller back, and if the buyer was under-credited, the seller has to make the buyer whole. This is not always the case. That’s why you really need to look at your tax reproration agreement.
If the seller received exemptions that were not earned, you should look to the contract, the attorney review letters, and the tax reproration agreement to see what was agreed. Under the terms of the current multi-board agreement (which may or not be the contract that was used in your transaction), the seller is not entitled to unearned exemptions. However, the parties may have decided on something different during attorney review. The attorney who handled your closing should be able to assist you.