May 26, 2023
The property tax adjustment at closing is a crucial aspect of real estate transactions to ensure a fair distribution of tax responsibilities between buyers and sellers. We understand the importance of accurate property tax adjustment at closing to avoid any surprises. In this blog post, we will guide you through the process of property tax adjustments, explaining how it works and its significance for both buyers and sellers. Whether you are a first-time homebuyer or an experienced investor, this information will empower you to navigate the closing process with confidence.
Whenever a property changes hands, it is essential to ensure that each party pays its appropriate share of property taxes. This process is known as property tax adjustment. In the City of Edmonton and Calgary and most other municipalities in Alberta, property taxes are due on June 30th each year, covering the entire calendar year. To ensure a fair distribution of tax responsibilities, property tax adjustments are calculated based on whether the taxes have been paid in full or not.
When the property is sold, if the seller has paid the property taxes in full, the buyer will owe the seller a proportionate share of the taxes. Conversely, if the taxes have not been paid, the buyer will receive a credit for the seller’s share of property taxes. These calculations are meticulously done based on the exact closing date. In Alberta, it is customary for the seller to bear responsibility for the entire closing day, even if the exchange of keys typically occurs at 12:00 noon.
Once the sale is complete, the seller’s monthly payments for property taxes cease. As the lawyer for the seller, our office initiates the request to stop these monthly payments. However, it becomes the buyer’s responsibility to arrange their own monthly payments, as the municipality requires direct authorization from the new property owner. This authorization can only be obtained after the title is transferred to the new owners.
Failure to make immediate arrangements for monthly payments can result in receiving a bill for the full amount owed until December 31st. If the closing date falls before June 30th, buyers have until that date to pay the outstanding amount without penalties. However, if the closing date is after June 30th, the remaining amount must be paid in full within 30 days to avoid penalties.
Property tax adjustments at closing are a critical aspect of real estate transactions. Understanding how these adjustments work is essential for both buyers and sellers to ensure a fair distribution of tax responsibilities. By being aware of the calculations, responsibilities, and potential penalties, parties can navigate the closing process with confidence. At Passgo Real Estate Law, we are committed to guiding our clients through property tax adjustments and providing comprehensive assistance to ensure a smooth and transparent experience.
1. What is the Adjustment Date in Real Estate?
The adjustment date in real estate is the day on which expenses, such as property taxes, are adjusted between the buyer and the seller. This date ensures that the buyer is only responsible for paying property taxes from the adjustment date onward, while the seller covers their share up to that point. It ensures both parties fairly divide costs for the time they own the property.
2. What are Adjustments in Real Estate?
Adjustments in real estate refer to the process of settling costs like property taxes between the buyer and the seller at closing. These adjustments ensure that the buyer is not responsible for taxes that accrued while the seller owned the property. The seller’s unpaid property tax bills are often covered up to the closing date, and the buyer starts paying for taxes moving forward. This adjustment is typically calculated based on the purchase price and prorated to cover the exact days each party owns the property.
3. How is Property Tax Adjusted at Closing?
At closing, property taxes adjusted between the buyer and seller are based on the adjustment date. If the seller has already paid the full year’s property taxes, the buyer may reimburse the seller for the portion of the year they will own the property. If the taxes haven’t been paid yet, the property taxes adjusted so that the seller pays their portion at closing, and the buyer takes responsibility for paying property taxes after the closing date.
4. How Does Property Tax Affect Mortgage Payments?
In many cases, the tax is bundled into mortgage payments through a tax account held by the lender. The lender collects a portion of the annual property tax bills with each payment and pays the taxes on behalf of the homeowner. This ensures that when the final tax bill is due, it’s covered without needing a large lump sum payment.
5. What Happens if the Final Tax Bill Changes After Closing?
If the total taxes change after closing, adjustments may still need to be made between the buyer and the seller. For example, if a reassessment results in a higher or lower property tax bill, both parties may need to review and settle any discrepancies.
Hi! I’m Erin Crocker. I’m a real estate lawyer with over 10 years of experience in Alberta and British Columbia real estate law. I love technology and efficiency. I’m on a mission to create a modern, digital closing experience for buyers and sellers through technology, transparency and sharing knowledge.
