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SUPPLEMENTAL TAX BILL

SUPPLEMENTAL TAX BILL . . .
DON'T BE CONFUSED

Updated:         May 28, 2018

A "supplemental tax" bill is generated, with rare exception, in every real estate purchase transaction. (New construction will also trigger a supplemental tax bill). The supplemental tax represents the difference between the old tax amount (paid by the seller) and the new tax amount to be calculated on the increased purchase price. This differential amount is then adjusted for the time period between the close of escrow for the new purchase and the next tax assessment period. Sound confusing? It can be. . .but, let us try to explain how it works.

Taxes are typically pro-rated in escrow. This pro-ration is based upon the seller's current tax assessment. If the seller has owned the property for several years, it is likely that the current assessment is lower than the new one will be, based upon the new purchase price. A tax assessment occurs every March 1st for the tax "year" that begins July 1st and continues until June 30th of the following year. The tax collector does not want to wait until the next assessment period and next tax year to begin collecting the higher taxes due, so an adjustment is made immediately on the day of close of escrow until the beginning of the next tax year. In other words, a supplemental tax becomes a lien against your property on the date ownership changes (or the date you complete new construction).

THE PRORATION FACTOR

The amount of your supplemental assessment depends on when the tax becomes effective and the number of months remaining until the end of the tax year, June30. The supplemental tax becomes effective on the first day of the month following the month in which the change of ownership or completion of construction actually occurred.

This can be confusing, so let's look at an example. A property acquired in 2012 for $150,000, with taxes at $1600 ($133.33 a month) a year, closed escrow on April 15, 2018 at a new sales price of $300,000. The new taxes, estimated at a tax rate of 1.1% times $300,000 value will be $3300 a year ($275 a month) or $1700 a year difference.  Taxes in escrow will be pro-rated on the $1600/yr. value but supplemental taxes will be based on the $3300/yr. assessment level.

 

So, estimating close of escrow on April 15, 2018, the tax pro-ration for the buyer is 2.5 months until June 30, 2018 or $333 (2.5 months x $133.33/month). Since taxes would have been paid by April 10th, at the latest, the $333 is a credit to the seller in escrow. Now, beginning April 15th the supplemental tax is initiated. The $1700 a year difference (noted above) must be accommodated. The new tax assessment will not be made until March 2019 for the tax year beginning July 1, 2018. Supplemental taxes must be collected for the time period between April 15, 2018 and June 30, 2019 or 14 months. The monthly difference of $141.67 ($1700 divided by 12 months) is billed to the new buyer. This supplemental tax bill typically arrives 90-120 days following close of escrow and can be paid in two installments usually 60 days apart. Because the supplemental tax is over two tax years, the new borrower will likely receive two supplemental tax bills. He good news is that if you are impounded, this substantial supplemental tax bill can be paid via your monthly payment (your impound account was established with anticipation of higher taxes). You will have to send the supplemental tax bills to your lender with the request that  they be paid out of your impound account.

 

The above example illustrates the substantial impact upon an unsuspecting buyer. Even though supplemental taxes are addressed in the purchase contract, many buyers misunderstand this “extra” tax bill. While they understand the pro-ration of taxes in escrow, this bill is often a total surprise. More importantly, the buyers have seldom prepared for such a payment.

 

INSTALLMENT DUE DATES

The installment due dates and delinquency dates will vary depending upon the month in which the bill is mailed. If the supplemental tax bill is mailed within the months of July through October:    A.) the First Installment is delinquent on December 10th of the same year.  B.) the Second Installment is delinquent on April 10th of the next year. If the Supplemental tax bill is mailed within the months of November through June:  A.) the First Installment is delinquent on the last day of the month following the month in which the bill is mailed.  B.) the Second Installment is delinquent on the last day of the 4th calendar month following the date the first installment is delinquent. Generally, the "supplemental" bill usually arrives 90 to 120 days following the close of escrow. The home owner can pay the bill in two installments usually about 120 days apart.

The confusion results from the fact that most buyer's believe that the tax situation was accommodated in escrow with the tax pro-ration mentioned above. Further confusion occurs when a borrower has their loan "impounded". . .meaning that taxes and homeowner's insurance are paid with their monthly mortgage payment. (All FHA and VA loans and most conventional loans with less than a 20% down payment are impounded.) Impounded borrowers are apt to ignore or even discard the supplemental tax billing, believing that it is taken care of with their monthly mortgage payment. The result is that this tax sometimes goes unpaid and the buyer finds they have delinquent taxes plus late fee penalties to pay at some future time.

Unfortunately, estimated supplemental taxes are not included in the impound calculation. Never-the-less, the supplemental tax bill may be sent to the lender for payment. This will result in an adjustment to your impound account monthly payment amount in order to repay the lender for this unanticipated expense. While it can be best for the borrower to prepare for and pay this supplemental tax, if funds are not available, an alternative is to let the lender (if you have an impound account) pay the bill and reimburse the lender on a monthly basis over time. If you are not impounded, the supplemental tax bill is the owner's responsibility and needs to be paid within the time limits to avoid the above mentioned delinquency and penalties.

Advance preparation for this supplemental tax bill will avoid any unpleasant surprises. If you have questions, the Tax Assessor's office can provide data regarding how to figure the estimated supplemental tax on your specific purchase as well as provide additional valuable information.

IT IS VERY IMPORTANT TO KNOW THAT THE LENDER DOES NOT AUTOMATICALLY RECEIVE THE SUPPLEMENTAL TAX BILL. WHILE YOU MAY HAVE ENOUGH MONEY IN YOUR IMPOUND/ESCROW ACCOUNT TO PAY THE BILL YOU MUST GIVE THE LENDER A COPY OF THE BILL. WITHOUT IT THEY WILL NOT KNOW THE AMOUNT DUE AND IF NOT PAID IN A TIMELY FASHION (BY THE NEW PROPERTY OWNER OR THE LENDER) THE RESULT WILL BE PENALTIES!!

 

Web Page/Supplemental Taxes