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 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
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