Tax problems with newly bought property

12 Replies

I bought a condo unit back in March. I got a good price on the unit and have been very happy with the profit I am making on it. Recently I received the tax bill for 2014. When I bought the property, the taxes were shockingly $0 because of deductions the previous owner received (she was out of state, elderly lady, not sure what else). I went over this with my lawyer a few times and he simply replied that her deductions could make this possible. I was surprised, but I went along with it. 

When I received the 2014 taxes, the bill was for a significant amount of money that I did not account for.  One reason he guessed might have been the case is the previous owner did not keep the deductions in place or file the paperwork. He said because this breaks the contract we could go after them. The only problem is, the owner now lives in Texas (the property and I are in the Chicago suburbs) and had been difficult to get a hold of during the closing and negotiating processes. This was my first deal and I have learned a great deal, but I am looking for some guidance and feedback from fellow investors. I appreciate the help and hope to give back in some capacity to you all!

I'm really more confused by what your lawyer is telling you than anything else. I've personally never seen a $0 property tax bill....but that's a moot point to the actual situation.

Whenever you buy a property (everywhere that I know of) the value will be reassessed. It is generally reassessed based on the purchase price, which will then set your property tax amount. It's part of the process of purchasing, and rarely will a tax bill stay the same. And really it's something you need to learn to calculate, not exactly, but close enough. 

I review the current assessed value and then compare that to my purchase price. Whatever that ratio is I multiply times the current tax bill. So an assessed value of $50K with a purchase price of $75K means that my bill will be about 1.5X the last bill. I've never been dead on, but it's close enough to evaluate my budget.

Further the deductions she received, are based on HER ownership not yours. Once you purchase, the property will obviously lose those deductions because she no longer owns it. So I'm not sure what it is that your lawyer is saying she could even remotely be liable for? The onus is on you to assess what your financial position in the property will be not the seller's. 

Sorry I know that's probably not what you wanted to hear, but I don't see how this is the seller's problem at all.

@Matt Devincenzo Thank you for the response. Just to clarify, since the property taxes are paid the following year, I pay for the previous year's taxes? 

The tax bill is for the 2nd half of the year for 2014, not 2015. I bought the condo in March of 2015. I was under the impression that I would pay the taxes from 2015 from March - December of 2015 and the taxes would be prorated for 2014, Jan-March 2015. Am I wrong?

There is absolutely no way for a previous owner to "keep deductions in place". And to think that you could "go after" the previous owner is just sillyness - I can't imagine any real estate sale contract that would even try to predict or insure anything about what future taxes would be. The tax will be recalculated at sale based on the mil rate and the new valuation.

Your question about proration of taxes would depend upon how it's done in your state - some states do the full calendar year and some do fiscal year. This is usually all taken account of at closing, so if you haven't already, check your settlement statement and see how that was apportioned. If it was done incorrectly, talk with your broker or closing agent

Medium team zen logo vJean Bolger, 33 Zen Lane | http://www.solidrealestateadvice.com

We can't read your tax bill, so we can answer your question accurately.  Sounds like you need the taxing authority to explain it to you.  Your tax liability should start March 2015, period.  It sounds like, maybe...part of her exemption was homestead exemption, which maybe the tax authority found out was improper since she no longer lived there.  They then recalculated her tax due, which gave Her a larger tax bill.  But, that tax bill Does attach to the property.  If this is the case, it may be the title/closing co. responsibility to get the proper reimbursement from the previous owner, or not.  Either way, you should only have to pay for taxes While You Owned It.  But, collecting from the former owner may be an issue.

If the taxes for are 2014 and you bough it in March 2015. Then that is a title insurance problem and you should be able to go after the former owner. But the title company that closed the deal is the first on to go after. They were insuring that the property was free and clear of all liens and encumbrances. Normally the title company is responsible for seeing that any taxes due prior to closing date are paid. 

Of course you need to check your documents. What did your original contract say? Did the title insurance have any exceptions?

Medium crab1 copyNed Carey, Crab Properties LLC | http://baltimorerealestateinvestingblog.com/

@Trevor Fritz I think I understand what you are trying to say but correct me if I am wrong. On your closing statement or HUD on the first page the seller would have credited you for the Remainder of the year in 2014 for you to pay in Fall of 2015. I can't imagine the seller had a $0.00 tax bill unless it was new construction but what I think you might be saying is the seller had tax exemptions in place at the time of sale that the credit to you was based on and that credit didn't cover what you got jammed with two months ago.

Generally Ted credits in Chicago range from 105-115% of the prior years amount but with exemptions expiring sometimes that jades the numbers.  

Would be more than happy to check it out for you or explain it cleaner to you if you wanted to email me your closing statement.  

Medium untitledMark Ainley, GC Realty & Development LLC | [email protected] | 630‑587‑7400 | http://www.gcrealtyinvestments.com | Podcast Guest on Show #72

Originally posted by @Mark Ainley :

@Trevor Fritz I think I understand what you are trying to say but correct me if I am wrong. On your closing statement or HUD on the first page the seller would have credited you for the Remainder of the year in 2014 for you to pay in Fall of 2015.

Mark is correct here. Check your HUD-1 for the purchase and see if you received a credit for the property taxes. You should see it on the first page, probably on lines 210 or 211, but could be elsewhere in the 200s, depending on how they prepared the HUD-1.

Medium cluebussol logo3inLinda Weygant CPA, Clue Business Services, Inc. | [email protected] | Podcast Guest on Show #244

@Mark Ainley  and @Linda Weygant thank you for the reply. You are both correct. When I look over the title commitment it says:

"THE FIRST INSTALLMENT OF 2013 TAXES SHOWS NO AMOUNT BILLED.

THE SECOND INSTALLMENT OF 2013 TAXES SHOWS NO AMOUNT BILLED.

THE FIRST INSTALLMENT OF 2014 TAXES SHOWS NO AMOUNT BILLED .

THE SECOND INSTALLMENT OF 2014 TAXES IS NOT YET DUE, PAYABLE OR DELINQUENT." - I found this surprising as well, but my lawyer said there were no red flags.

Also regarding the contract:

"The general Real Estate taxes

95 shall be prorated as of the date of Closing based on \CSSgo of the most recent ascertainable full year tax bill. All

96 prorations shall be final as of dosing, except as provided in Paragraph 22. If the amount of the most recent

97 ascertainable full year tax bill reflects a homeowner, senior citizen or other exemption, a senior freeze or senior

98 deferral, then Seller has submitted or will submit in a timely manner all necessary documentation to the

99 appropriate governmental entity, before or after Closing, to preserve said exemption(s). The requirements of

100 this Paragraph shall survive the Closing."

I guess my main question, which I should know, if someone typically purchases a property in 2015, does the buyer pay the property taxes for the 2014 year or does the buyer not start paying taxes on the property till 2015 taxes is due? Thanks again for all of the help

@Trevor Fritz - If you bought the condo in March 2015 you should have received a tax credit on your HUD for the peroration of 2014 taxes. If you used a MLS contract there is a section in which your agent would have included a percentage.

If her taxes were $0 then she received a senior freeze exemption, which would not pass along to you in 2015.  But it should have been in place for all of 2014.  

The legal ramification would be dependent on how your lawyer worded the tax payment during the attorney review period.  

Medium second city real estate logo   white close upBrie Schmidt, Second City Real Estate | [email protected] | http://www.SecondCity-RE.com | IL Agent # 471.018287, WI Agent # 57846-90 | Podcast Guest on Show #132

@Jean Bolger I appreciate the comment. I think I may have worded this incorrectly, which is why you found my comment incorrect and you misunderstood my intentions regarding not future taxes, but previous taxes (paying the 2014 taxes in 2015). @Brie Schmidt thank you very much for the clarification, that does help significantly. 

It is unlikley a title problem unless the title company missed any taxes that were "currently due and payable." If this property is in Cook County, the 2014 2nd installment did not become due until August 2015. This sounds like a newly built or newly created condo. The first installment in Cook County is exactly 55% of the previous year's total taxes on THAT PIN (taxes in IL are by PIN, not common address). If your unit's PIN did not exist in 2014 (because it was created for the 2015 tax year) then the 2014 first installment would be $0 and the full tax liability will be assessed on the 2014 2nd installment. For 2015, the assessment should be corrected, i.e., the first installment will be 55% of the 2014 total and the 2nd installment will then be 45%. You should do some research into the history of the property. Was it vacant landpreviously? Was it an apartment building? I get retained for these types of issues quite frequently.