What is a Real Estate Tax Reproration Agreement?
During the course of a real estate purchase or sale transaction, the parties’ attorneys will work to make sure that a fair tax credit is provided to minimize the burden of real estate taxes on both parties in the transaction. While other methods are used as well, in some instances, a real estate tax reproration agreement is the best option available. Tax reproration agreements are almost universally used in large commercial transactions (though not always in smaller commercial transactions), and are also often used in new residential construction. They are also used in residential resale transactions when an accurate tax credit cannot be determined at the time of closing, which could happen for any number of reasons.
So what is a real estate tax reproration agreement? Basically, it is an agreement between the parties to reprorate the tax bills when they become available in the future. Such agreements come in handy because in Illinois, real estate taxes are billed a year after they accrue; therefore, at the time of closing, the tax liability may be unknown. After closing, the buyer will become responsible for all of the upcoming tax bills, including the tax bills for the year prior to closing.
In a typical real estate tax reproration agreement, the seller will give the buyer an approximate tax credit based on the most current tax information available for the property. When the actual tax bill comes out, the seller will be responsible for any shortage for his period of ownership. If it turns out that the bill is less than the credit that the seller gave the buyer, then the buyer must return the excess funds to the seller.
The primary advantage of using a tax reproration agreement is that if all goes well, the outcome is the most fair outcome you can have — each party only pays what he actually owes, and nothing more. On the other hand, there are some important disadvantages to note as well. For example, many people prefer to close on a property and be done with it; they do not want to have to revisit the tax issue a year or more after closing. Also, it is always possible that one party to the agreement may not have any money at the time of reproration, and will therefore be unable to fulfill his obligations. Of course, a standard tax reproration agreement allows you to sue the other party in the event of default, but lawsuits can be costly. There is also a chance that one party to the tax reproration agreement might pass away before the taxes are reprorated, and the other party would then have to seek out the deceased’s estate to collect any tax monies owed.
At what time is the reproration agreement signed? Is it before signing the Real Estate Contract is signed , signed at same time as the Real Estate Contract and included as an attachment, or after the Real Estate Contract is signed but during Attorney Review period, or another time?
Hi Michele,
In a residential transaction, typically a real estate tax reproration agreement is negotiated by the parties’ attorneys during attorney review and signed at the Closing. In a commercial transaction, a real estate tax reproration is often negotiated by the parties’ attorneys before the contract is signed, and is therefore included in the contract. I hope that helps!
Hi there!
The 2020 tax bill came out on a home we purchased in April and the taxes went up about 250% from what was calculated at closing. From my understanding, we have this agreement in place where the seller is responsible for any shortage for his period of ownership (about $2k in this case).
Do you know who is responsible for contacting the seller and collection of these funds? Seems a little awkward that the buyer should be expected to do this but perhaps I’m naive? Thanks in advance.
Hi Mel,
The full 2020 tax bill is not available yet in Cook County and the collar counties. It won’t be available until next summer. Having said that, if you entered into a tax reproration agreement at closing, you should contact the real estate attorney who handled your transaction. He or she should be able to tell you who is holding the escrow (if there is one) and get the funds released for you. I hope that helps!
We are selling my 90 year old mothers townhouse in Illinois as she is moving in with a relative. My Mom has been eligible for the senior freeze exemption the entire time of her home ownership. The buyers attorney wants to exclude the senior freeze exemption at closing essentially costing my Mom an additional $1,448 at closing. It seems unfair that my Mom should not be allowed to take full advantage of her reduced senior freeze rate.please advise .
Hi David,
Talk to the attorney handling your closing about this. Most likely it can be taken care of through an escrow and reproration. That way you will have a fair result.
Naheed