Understanding Property Taxes When Your Purchase A Property

By Lorne Shuman:

Whether you buy or sell property, there will be an adjustment for property taxes between the buyer and seller. This column will explain how payment of property taxes is addressed by your lawyer in different real estate transactions.

First, the most common scenario – when you purchase or sell a resale property. Whether you are buying or selling, a document called a statement of adjustments will be prepared by the seller’s lawyer. This document will adjust for the property tax payment between the buyer and seller to the date of closing. If the seller has prepaid the property taxes beyond the closing date, the seller will receive a credit for the amount of its overpayment on the statement of adjustments. Similarly, if the seller has underpaid, the buyer will receive an appropriate credit on the statement of adjustments.   In addition, the seller will provide the buyer on the closing date with a signed undertaking which states that the seller will pay all property taxes in accordance with the statement of adjustments.  A tax certificate obtained by your lawyer will confirm whether or not taxes are actually paid up to date, or whether there are any unpaid taxes.  In lieu of a tax certificate, if you have instructed your lawyer to arrange for a title insurance policy for you, you will have insurance coverage for any tax arrears arising from the seller’s period of ownership.

If you are buying a newly constructed condominium or house, the process will be different as the municipality assesses the land value of the property and will first issue a land tax bill to the builder. Typically, the builder will pay the land tax bill for the property for the calendar year of the closing and will receive a credit on the closing date for the buyer’s share of the land taxes from the closing date until the end of the calendar year. At the time of closing, however, the municipality will not have assessed the value of the building or house portion of the property.  This may not occur until one to two years after the closing date.  Once the taxes for the building or house portion have been assessed, the municipality will issue a supplementary tax bill which will be mailed to the property address.  The buyer will be responsible for payment of the supplementary tax bill.  Sometimes, however, the builder will estimate the supplementary taxes for the calendar year of the closing and will take a credit on the closing date for the buyer’s share of the supplementary taxes, even though the supplementary taxes have not yet been assessed or billed.  In such circumstances, the buyer, once it receives the supplementary tax bill should send such a bill to the builder for reimbursement. As with resale properties, if you have instructed your lawyer to obtain a title insurance policy on your behalf, you will have insurance coverage for any tax assessments or re-assessments arising from the builder’s period of ownership, if the builder does not pay its share of the taxes.

Source: Lorne Shuman, Isenberg & Shuman Law