Tax Proration Agreement For Home Purchase

[liquid]

I closed on a home in Florida on 6/1/06. Among the closing costs paid by the sellers (let's call them the Smiths) were the prorated county property taxes for 2006. These came to around $615, based on 2005 taxes of around $1,500.

The Smiths had themselves purchased the home in 2005, so the 2005 taxes of $1,500 were based on the previous owners' (let's call them the Wilsons) assessed value of the property. The Wilsons had owned the property for many years, and in Florida the annual increase in assessed value is capped at 6% for homesteaded propeties. Due to dramatic increases in property value in the area, 2005 taxes were based on an assessed value that was far under the market value of the home when it was sold in 2005. Accordingly, when the notice of 2006 property taxes was sent out a few weeks ago, taxes had indeed gone up to around $4,700.

At closing, the Smiths and I signed a Tax Proration Agreement, which states:

"We, the undersigned buyers and sellers of the above described property, hereby acknowledge that the proration of the real estate taxes that appears on the closing statement was made without the benefit of the current year's tax bill or property assessment. We approve the proration which was based on the previous year's taxes in the amount of [around $1,500]. Should the taxes for the current year differ from those for last year, we agree to make further adjustments or prorations between ourselves, and we hold [the title company handling the closing] harmless from any change in the taxes, the proration or the payment of the current year's taxes."

Am I correct in my interpretation that this means a re-proration of 2006 taxes should occur, since the Smiths' portion of 2006 taxes should be based on the actual 2006 taxes of $4,700 rather than the previous year's taxes of $1,500? (This means that the Smiths would be paying an additional $1,300 or so for 2006 taxes.)

If so, how should I go about seeking this re-proration? Should I contact my real estate agent, or the closing attorney, or the Smiths directly, or a real estate attorney?

Is there a legal obligation on behalf of the Smiths to remit to a re-proration of 2006 taxes?

Thanks in advance.

[PanchoVilla]

This is definitely a question for the escrow officer, your accountant or your lawyer. I am none of those, just a licensed RE agent in California. But I will make an educated guess. You should ask those other people this question though.

Does Florida use a property tax year that follows the calendar? In California the property tax year runs from 7/1/05 -> 6/31/06.

Does Florida bill at the end of the year? Ie will they do the assesment and send you a bill in december for the whole year? Ie, did they already re-assess the house for 2006?

Assuming those things are true I think what would happen is something like this.

You have to pay the $4700 to the county.

Their part:
(5/12)*(4700) = 1958
Your part:
(7/12)*(4700) = 2742

Look at your closing statement. You should see some type of credit to you for the pro-rated taxes based on $1500 so something around $625 ish.

They have paid:
(5/12)*(1500) = 625
So they should have to pay you 1958 - 625 = 1333.

That seems like a really bad system because you have to collect the money from the seller yourself months later. IANAL but it looks to me like you both already agreed to re-prorate the taxes based on the real bill in that agreement above.

I would do the following.
1. Do the math according to your understanding of the pro-ration.

2. Call the escrow officer and go over your number with her and ask if that sounds like the right way to redo the pro-ration.

3. Write the seller a letter. Include that part of the contract, and a copy of your tax bill. Then show them a number with the math and mentioned you talked to the escrow officer and suggest they do the same. Just put something like according to my calculations your share of the actual property taxes is $1958 and you have paid $625 so far in escrow.

4. Only if you can't work anything out then go down the other route. If you just have a lawyer send them a letter that starts things off on the wrong foot. Catch more flies with honey and all that.

Pancho

PS This seems like an absolutely retarded way for this to be handled as it seems like there is a lot of cases where this could end up in a lawsuit.

I mean what if the guy who bought in 2005 was a flipper who did a bad job of managing his money and he made $0 on the flip. Now the buyer says you owe me $1300 for property taxes but he is broke.

Hello small claims court.

It would make far more sense for the title company to estimate the taxes. At least then they could get the taxes close so if the new buyer gets screwed its for like $40 not $1300. Instead they just put this clause in that says you can't sue them if the seller skips out on the $1300. Lame.