Whenever a real estate purchaser and seller go to the closing table for a Cook County property, they have an interesting dilemma. Property taxes. How do they deal with the real estate taxes? Property taxes are paid in arrears. As a result, whenever a buyer and seller close on real estate in 2017 (at least prior to July 1 in Cook County), there is a tax obligation that spans parts of two different years (2016 and 2017) to deal with for those years of the seller’s ownership where no tax bill has yet come out. To make things “easier” on the parties and because the exact amount of the tax bill usually cannot be determined at the time a contract is signed or at the time of closing, most buyers and sellers agree to a “tax proration” as part of the real estate contract. At closing, the seller pays to the buyer by way of a credit a certain amount of money to compensate the buyer for the real estate tax bill that will come out when the new buyer owns the real estate and after the closing has taken place for time periods prior to the buyer’s ownership of the property. Usually, these prorations are final (although there are good reasons to reprorate or revisit the tax proration in certain circumstances – always consult with your real estate attorney on this!)Most of the form real estate contracts contemplate a proration to be provided by credit at closing. The multi-board 6.1 contract that is in use in much of northern Illinois provides as follows:
Generally, Chicago properties customarily provide for a proration at 110% of the most recent tax bill. Keep in mind, that taxes are paid in arrears. When we go to close in 2017 (anytime before July 1), we have two tax years to deal with – 2016 and 2017. The general proration at 110% is based upon the assumption that “taxes go up” and taxes for the second year (2017) are likely to go up from the 2016 amount (remember, the proration is based upon the 2015 bill).
As for the bill that just came out (first installment 2016 payable March 1, 2017), that bill is considered just an estimate. First installment bills are always 55% of the prior year’s full tax bill. So, we don’t know anything about what the 2016 tax bill will be based on the first installment. Any increase, decrease, loss or addition of an exemption, or change in assessed value will be reflected only upon issuance of the second installment bill.
So, a 100% proration is probably never appropriate unless there is some kind of exemption expected to go into place that was not on the last full year bill or there was a significant drop in assessed value. 2015 taxes reflect the triennial reassessment for Chicago, so those bills for 2016 and 2017 will reflect the assessed value, so that’s not an issue here. In the suburbs, the taxes tend to go up less steeply, so 105% is a common proration in Lake or DuPage Counties.
Under what circumstances would 115% be reasonable? Definitely in a year like 2015 when there is a new assessment that has not been reflected, in those instances where an exemption will fall off (although there are more effective ways to deal with that), or in a circumstance like Chicago where there is an anticipated, larger-than-normal tax increase contemplated.