Indiana Property taxes can be confusing, particularly to a Seller who needs to credit the Buyer for unpaid taxes at closing. Buyers can be caught off guard too by thinking that the tax credit provided by the Seller is “Free Money”; it is not. We’ve found that it is not only the Sellers and Buyers who get confused, many Realtors, Title Agents, and County officials don’t fully understand how property taxes work either. Part of the problem is in the vocabulary used to explain Property Taxes and billing. Another problem seems to be the delay involved in the assessment of property, determination of the tax rate, and the semi-annual collection period of the payment. Further complicating things is the recent Property Tax reform legislation. We’ve simplified the process of estimating taxes by creating a spreadsheet to help calculate what you will owe at closing. All you need to know to use the tool is the closing date and the semi-tax amount. Although it simplifies calculation, you still need to understand current tax issues that might affect the accuracy of the estimation, such as the phase-in of the Property Tax Circuit Breaker and changes to deductions. Unless otherwise negotiated, the most recent semi-tax amount will be what is used by the Title Company to estimate the credit.
Though this spreadsheet simplifies the calculation of Property Taxes for the Seller, additional information might also be helpful. The first step is discussing the vocabulary. VOCABULARY Arrears – Indiana property taxes are paid in the arrears meaning they are paid after the fact. Specifically they are paid to the State the year after they have accrued. At any given time, you as the Property Owner, owe the State at least 85% of one year’s worth of property tax, usually more. That is because you pay your taxes about 10.5 months after the accrual period (due dates are May 10, & Nov 10). This lower amount would occur the day after taxes are due in which case you would either still owe 6 months of the prior year’s taxes plus a prorated amount up until May 11 of the current year (if you are closing May 11), or you would owe a prorated amount from January 1 until November 11 (if you are closing Nov 11). It increases from there with the highest amount owed on May 9 or November 9 where you would either owe a full prior year’s worth of taxes plus the prorated amount from January 1 to May 9 in case 1, or the final installment of the prior year plus nearly a year’s worth of prorated taxes from January 1 to November 9 in case 2. Accrued Taxes – These are the total taxes that you owe but have not yet paid. They would include any unpaid taxes for the previous year (or years in case you are behind on payments), plus the prorated amount for the current year. Proration – Proration is used to determine the taxes that have accrued during the current year (excluding any prior year taxes). It is based on the closing date and where that date lies relative to January 1 of the current year (i.e. the number of days that have elapsed). For example, if you close on January 2, your prorated taxes for the current year would be 2 days worth of taxes. That would be in addition to the entire prior year’s taxes, which would also remain unpaid. Close on December 31 and you would owe approximately 365 days worth of taxes. In this latter case you should only owe prorated taxes, since the prior years taxes should have been completely paid by November 10. Escrow – Often the seller has their taxes escrowed or collected in advance by the lender to insure they are available at tax payment time. This pay as you go plan helps alleviate some of the pain during payout, but escrowed taxes typically won’t get paid out by the lender until after closing, so don’t count on that money being available to you at closing, it will be refunded later. Semi-Tax – Property Taxes are billed twice a year in Indiana. The semi-tax amount is equal to ½ of your yearly tax bill. This is the amount of taxes to be paid twice a year based on the properties assessed value and the tax rate applied to the assessed value. Note that not all of the Taxes in the Semi-Tax are paid in the arrears. In some cases solid waste or special assessments are included in the semi-tax amount. This portion is usually billed within the year incurred, so there could be some error involved in the estimating using the full semi-tax amount. The Title Company would be the best source for breaking down the actual arrears portion of these costs. These additional taxes are not typical for most areas. Run-With-The-Land – Property Taxes are said to “run with the land”, which means the owner of the land must pay them when they are due (or else risk a tax lien or foreclosure). Since taxes are paid in the arrears, a new owner will be responsible for payment of taxes that accrued under the previous owner. To compensate for this, most Purchase Agreements call for collection of property taxes from the Seller based on the accrued taxes up to the date of closing. So even though the taxes accruing for the Buyer won’t be due for a year, the Buyer is still responsible for paying taxes at the next due date, which depending on the closing date, could be a day or two away. Typically the Buyer will be paying those taxes with the Seller funds credited at closing. OTHER HELPFUL INFORMATION Due Dates - Property taxes are paid twice a year. The first installment is due on May 10 of each year and the second installment is paid on November 10. The tax payment of May 10 of the current year is for the accrued taxes of the prior year from January 1 to June 30. The tax payment due on November 10 is for the prior year accrual period from July 1 to December 31. Estimating Taxes - In order to collect taxes from the Seller at closing, some estimating has to be done. First of all, even though taxes have accrued during the Seller’s ownership of the land, the amount due is undetermined. There are several reasons for that. First the land gets reassessed and that assessed value may not be known at the time of the settlement. This would tend to affect the prorated amount, but in certain years of assessment delays or challenges, it could affect the prior year’s taxes as well. Second, when the tax bill comes due it will be based on a tax rate that is applied during the year of payment, not the year of accrual. Therefore, there could be cases, particularly in periods of accelerated local government budget growth, where the semi-tax amount can change significantly from the prior year. In these cases further negotiation prior to closing may be necessary to collect from the Seller. Estimating is typically done by using the prior year’s semi-tax amount and applying it to the time period in question. Deductions - Taxes are calculated based on True Market Value of the property. The assessor calculates a Gross Assessed Value based on the value of the land and the improvements to the land such as buildings. Gross Assessed Value doesn’t necessarily correspond to what you pay for the property. You may file for deductions to reduce your taxable amount if you qualify. Common deductions include Mortgage and Homestead. They must be filed by a set date to apply to the current tax year. COMMON TAX MISTAKES New Home Purchase - An issue can occur when a lender uses the current tax value to calculate an escrow amount or affordability of a payment. If that estimate is based on unimproved land rather than the fully assessed value, that can cause problems. Make sure when you estimate mortgage payments, that you include a reasonable tax amount for the fully assessed value. Failing to File for Deductions - If a Seller fails to file for deductions, particularly the Homestead Deduction, he not only causes himself to incur higher Property Taxes, he also can make his home difficult to sale especially at the end of the year where there is not enough time for the new homeowner to file that exemption. Changes in the law have narrowed down this time window considerably, but changes have also raised the deduction significantly, so don’t miss this. Inaccurate Assessments - In some cases taxes may be assessed too low. This is more common on older homes that have not changed hands in several years or uncompleted builder homes that have been foreclosed. You should attempt find similar homes in the nearby area that most accurately represent the value of the home you are purchasing. If you get an extremely good buy on a foreclosure that has never been assessed, you might be shocked at what the tax bill could be once you complete the home. Also if you pay $500K for an older home that last sole in the 1970’s, you may find that you purchase price triggers a much higher assessed value. Check nearby homes of similar cost for a more accurate tax rate. Indiana Property Taxes, Indiana Property Tax Estimation