Property Tax Time in Texas – Tax Prorations

 By Karen Burnett, Senior Vice President, Escrow Manager

Property tax time comes around October 1 of each year. That is the date that the county tax assessors are supposed to have their property tax rolls prepared and ready to release. Since they do not always hit that date, we see tax bills released throughout the months of October, November, and December.

Part of the value of any title insurance policy is that it guarantees that outstanding taxes are paid through a certain date, so as part of the closing process, we request and review property tax information. If the tax assessor has not released the current year’s tax bills, then the title insurance policy will only guarantee that prior years are paid. Once the tax assessor certifies tax rolls and bills are available for payment, we can then guarantee that taxes are paid for the current year and prior years. In any closing transaction, whether it be a sale, refinance, or construction loan, property taxes are addressed in some manner.

For tax prorations on closing statements, the proration agreements in most Earnest Money Contracts provide the outline for how those are handled at closing. For the TREC contract form, that is Paragraph 13, and for the TAR contract form, that is Paragraph 14. If taxes for the current year are not available for payment by the date of closing, then buyers get a prorated credit from the seller from January 1 to the closing date and the property taxes for the current year become the buyer’s responsibility to pay once the bill is available. If the buyer has a lender who is collecting property taxes monthly in a reserve account, then the buyer’s lender normally pays them. If taxes for the current year are available for payment by the date of closing, then the property seller pays the entire bill, and the buyer gives the seller credit from the date of closing through the last day of the year.

On many closing transactions, prorations are relatively straightforward. For properties closing before April 1, which is the approximate date that proposed appraised values are released by the CAD, the prior year’s taxes are used for proration purposes since that value is the most current data available. For properties closing after April 1 but before tax bills have been released in October, prorations are based on the CAD’s market value multiplied by the prior year’s tax rates. Once tax bills are available for payment, then prorations are based on the actual amount billed as due to the tax assessor.

Sometimes, though, if a piece of property is new to the tax rolls, like in the case of a brand-new house, newly created condominiums, or property that has been newly subdivided, the amount to use for tax prorations becomes a bit of a math problem, and in the absence of actual data from the CAD, manual calculations are needed. In addition, if exemptions were in place on the property that is no longer applicable, such as the case of an over-65 exemption or a disability exemption, manual calculations are necessary to come up with a proration amount. Fortunately, the promulgated language in most earnest money contracts allows the parties to adjust the prorations between themselves if the amounts used at closing differ from the subsequent actual bill.

Tax time can be confusing and complicated, but our escrow teams at Independence Title are ready to help, so reach out to your favorite closing team at Independence Title for assistance!