What does prorated taxes mean
Taxes in most counties in IL, if not all of IL, are paid in arrears.
Taxes paid in the current year are for the prior year's assessment. ie. 2007 taxes are paid in 2008, 2008 taxes will be paid in 2009 etc.
I'll try to put it as simply as I can.
for example: a home had 2007 taxes of 6,000
2007 real estate taxes of 6,000 are paid in 2008.
This is usually in June and September with payments of 3,000 for each installment.
Let's say you buy this house and the new tax bill (for year 2008) hasn't come out yet. Your closing on March 1, 2008.
At the closing you will receive a credit for 2007 taxes in the amount of 6,000. The seller owned the house all of 2007 and is therefore responsible for the entire 2007 tax bill. The seller has also owned the property in 2008 from Jan. 1 to closing.
The pro-ration comes in on the 2008 tax bill (payable in June and Sept of 2009). Since we don't know what the taxes will be we count the days Jan. 1 to Mar. 1 (seller responsible for taxes on closing day) which in this leap year is 61 days.
If we pro-rate the taxes at 100% we use 6,000
105% we use 6,300
to base your 2008 tax closing credit.
at 6,000 it's 16.39 per day x 61 = 1,000.00
6,300 it's 17.21 per day x 61 = 1,049.81
6,600 it's 18.03 per day x 61 = 1,100.00
2007 tax credit 6,000
2008 tax credit 1,100 (using 110%)
total tax credit at closing 7,100 shown on the HUD.
The reason they do this, is so at closing the seller is "free and clear" of any tax obligations on the property once the property closes. You have received the taxes due that the seller was responsible for Jan 1 through closing date 2008. So when the 1st tax bill comes out in May 2009, you don't have to find the seller and try and collect the taxes for the days the seller owned the property.
Most REO sales I've run across state "taxes pro-rated at 100%" as generally a buyer is getting a home at a discounted price and will go to the county to have the property assessment adjusted based on the selling price. Wether or not the buyer is successful at this attempt is another story.
Your agent should be able to explain this as well. As a buyer, it's an obvious benefit to ask for a higher pro-ration. Most asset managers come back at 100%.
Wordy I know, legal advice it's not, a general description it is. I hope this helps.Source: www.agentsonline.net