Tax Proration & Allocation

Good Information to Know

  • A tax proration is something that is negotiated between buyer and seller and is agreed upon in writing in the purchase agreement.
  • Tax prorations are a “local custom” that can differ from county to county.
  • Buyers and sellers must understand that regardless of how the township, city, village or County Treasurer ’s office may determine that the taxes are paid, it has nothing to do with what was negotiated in the purchase agreement.

How to Avoid Problems With Tax Proration

  1. Read the purchase agreement before presenting the offer. If you don’t understand the tax proration language, ask someone at the time of closing.
  2. Do the buyers and sellers understand what they have agreed to in the purchase agreement?
  3. Do the Buyers and Sellers understand that the due date of the summer tax bill is July 1 and the winter tax bill is December 1?
  4. Does the Seller understand that if they receive money back on a tax proration, it must be reported to the IRS on the 1099 Form?
  5. The Taxable Value and SEV of all properties are reviewed and changed each year by the township or city. The Sellers of your current listings should be receiving assessment change notices from the local taxing authority in late February or early March. You should update this information after the Board of Review has met.
  6. As time goes by, the difference between Taxable Value and SEV will increase. This will lead to a large increase on the following year’s taxes – after the property has sold. You should be careful as to estimating future tax bills for purchasers.
  7. The Principal Residence Status of your listing could change while you have the property listed. If your seller has moved, please check and see if they have rescinded their Principal Residence Exemption.
  8. Consider what effect a pending millage vote can have on a future tax bill.
  9. Street light assessments, delinquent water bills, delinquent sewer bills or paving assessments may have been included in the tax bill. These items should not be included in a tax proration.

Unallocated Taxes

  1. Determine in the negotiation of the purchase agreement how you will prorate taxes on a parcel of land when they cover a large parcel of land.
  2. Take into consideration how the lender will establish the escrow account for taxes that are unallocated.
  3. Determine who is responsible to pay the tax bill as long as this parcel is covered under the old tax ID number.