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Buying & Selling Real Estate – What is a Property Tax Adjustment? PDF Print E-mail


One of the most frequently asked questions that we have of our Residential Real Estate department is related to the Property Tax Adjustment. It is not uncommon for Buyers to get settled into their new home and receive a Property Tax reminder – often times they ask themselves “how can I be responsible for the entire years’ worth of taxes if I only just moved in!”


Property Taxes are typically levied on an annual basis effective January 1st and become due and payable on June 30th (please note: these dates are specific to the City of Lethbridge – each jurisdiction may be different). Using these dates, this means that property taxes are payable six months after they become owing and cover six months into the future when paid on June 30th.


If you are buying or selling a home there is a good chance that you will incur a Property Tax Adjustment in order to complete your real estate transaction. A Property Tax Adjustment ensures that you do not over or under pay property tax; it ensures that you pay the correct amount of taxes actually incurred by you.


Property Tax Adjustments are typically calculated as follows:

(# of Days in year to Closing Date)/365 x Annual Property Tax Levy Amount=Adjustment Amount


There are two common types of Property Tax Adjustments:

  1. If the sale closes prior to June 30th, the BUYER will receive a credit for the amount of the year’s taxes owing to cover the portion of taxes not yet paid by the Seller. This effectively reduces the total amount paid by the Buyer, however, the BUYER is then responsible for paying ALL property taxes for the year by the due date;
    • Example: Joe is selling his home to Tom, the sale will close February 1st, and annual property taxes on the home are $2,000. Therefore, Tom will receive a Property Tax Adjustment credit on the purchase in the amount of $175.34.  Tom will be responsible for paying all property taxes for the year.
      (32 days to Closing Date)/365 x $2,000.00=$175.34
       
  2. If the sale closes after June 30th, the SELLER will receive a credit for the portion of the year’s taxes which are owed by the Buyer since the Seller has prepaid for the entire year’s property tax. This means that the buyer requires more money upfront to complete the purchase but will not incur additional property tax for the year of the purchase.
    • Example: Joe is selling his home to Tom, the sale will close August 31st, and annual property taxes on the home are $2,000.00. Therefore Joe will receive a Property Tax Adjustment credit on the sale in the amount of $1,331.51.  Tom will not incur additional property tax for that year.
      (243 days to Closing Date)/365 x $2,000.00=$1,331.51

 

Keep in mind that in some jurisdictions the municipality provides the option to pay property taxes by way of a monthly Tax Installment Payment Plan (TIPP). By enrolling in TIPP property owners can make smaller monthly payments rather than one large lump-sum payment – a convenient option from a cash-flow perspective.  Property Tax Adjustments for properties enrolled in TIPP are usually quite minimal and often do not significantly impact the closing costs for the buyer or net sale proceeds for the seller.

Buyers that choose not to continue with TIPP upon possession should note that:

  • If the sale closes prior to June 30th then they will be responsible for paying the balance of all taxes owing by June 30th; or
  • If the sale closes after June 30th then they will have to pay the balance of the year’s taxes when they become the owner of the property.

It is always a good idea to keep in mind the Property Tax Adjustment whenever you are completing a Residential Real Estate transaction as it will affect the final amount you will pay/receive. Check your Statement of Adjustments to understand how the Property Tax Adjustment impacted your particular Real Estate transaction. If you still have questions please contact our office.