SUPPLEMENTAL TAX BILL . . .
DON'T BE CONFUSED
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 2000 for $150,000, with taxes at $1600 a year, closed escrow on
April 15, 2005 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 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, 2005, the tax pro-ration for the buyer is 2.5 months until June 30, 2005 or $333. 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 2006 for the tax year beginning July 1, 2006.
Supplemental taxes must be collected for the time period between April 15, 2005 and June 30, 2006 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.
The above example illustrates the substantial impact upon an unsuspecting
buyer. Even though supplemental taxes are addressed in the purchase contract,
many buyers mis-understand 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.
Web Page/Supplemental Taxes