June 30 – a dreaded day in Brandon. The day property taxes are due for the current calendar year. If you own a home and you have not already received your property tax bill in the mail, be sure to contact the city as they are due whether you receive your bill or not!
Since property taxes are due in the middle of the year, it can make it a little confusing for first time buyers (or second and third time buyers for that matter) so I thought I would share with all of you what I have learned over this last month or so.
We’ll start with the basics first. You do have options when it comes to paying your property taxes:
- You can pay them all in one lump sum to the City on the Due Date
- you can go on the City of Brandon’s TIPPs (Tax Installment Payment Plan), where you will pay 1/12th of your property taxes each month to the City through automatic withdrawl from your bank account
- you can pay them along with your mortgage each month (or biweekly if that’s your payment schedule)
If you can afford to pay your entire property tax bill at once, that’s great, then it’s out of the way and you don’t have to worry about it for another year. But if you can’t, then I personally recommend the TIPS program as it seems to be the most simple. The City is the one that revises property taxes each year so if your taxes do change from year to year, they send you the bill along with the adjusted monthly payment amount you can expect.
Paying your property taxes with your mortgage through the lender can be a bit more complicated in the beginning but does even itself out for you over time. When you pay your property taxes this way, the lender will set that portion of your payment aside in a tax account and then when your property tax bill comes, they pay your taxes on your behalf to the City using that money from the tax account. Where it can get tricky is if you have not lived in your home for a full year as you will not have paid enough in that tax account to cover the amount the lender needs to pay on your behalf. Not to worry, normally the lender will still pay the taxes in full and then they will adjust your mortgage payments over the next year to make up the difference of anything they over paid for you.
That’s the easy part, now let’s get into the complicated part. When you take possession of you house, the new bank wants to be sure that property taxes are all up to date so in an ideal world, we’d all take possession of our new home on Jan 1 each year. This would make it unnecessary to do a property tax adjustment with the lawyer during closing.
We all know this is not the case. So let’s use an example of a May 1st 2015 possession and a property tax amount of $3000/year. Since you own that house on June 30 2015, you are responsible to pay that entire $3000 for the 2015 calendar year. Doesn’t seem fair since you did not live in the house from Jan 1 – April 30 2015. This is where the property tax adjustment comes in. When you meet with your lawyer, (s)he will make the adjustment so that you are being compensated for those 4 months that seller owned the home. How the lawyer does this is (s)he will figure out how much the property taxes were from January – April:
$3000/12 months = $250/month x 4 months = $1,000 is the sellers portion of the years taxes
Then lawyer will take the $1000 the seller owes for property taxes and take it off the purchase price (let’s say $200,000), so $200,000 – $1,000 = $199,000. He also adjusts deposits etc but we’ll leave that out as I just want to focus on the property taxes, not the closing costs. This means now the amount you pay the seller reduces to $199,000 instead of 200,000 so the lawyer will keep this money and use it toward the closing costs.
One thing to really be aware of is this $1,000 is for the property taxes from Jan – April 2015. You don’t physically see this money come to you from the seller because the lawyer just adjusted what you are paying for the lawyers services. It’s a little simpler than you paying $200,000 and then the seller giving you back $1,000. It’s 6 of one, ½ dozen of the other.
Keep in mind, now you are responsible for the entire 2015 year of property taxes, all $3,000. If you want to now get set up on the TIPPs program through the city, you will have to take that $1,000 you saved on your closing costs and give it to the City, along with the payments for May and June (an additional $500) to get the taxes paid up to June 30 and then the City can set you up on TIPPs and will withdraw the payments on a monthly basis for July 2015 and so on.
If you are paying your property taxes through the bank with a May 1st possession, you will only have made 2 payments of $250 by the time your full year of taxes are due. Therefore, the lender will be paying the $2,500 (that you don’t have yet) on your behalf and you’ll have to make up for that over the next year. They will adjust the tax portion of your mortgage payment accordingly. This would give you a fairly large total mortgage payment for the year but then when you are caught up, your tax payment should come back down to normal. I have suggested that clients put that $1000 toward their taxes up front so they have less being paid on their behalf by the lender, therefore having a smaller balance to make up over the next year.
Now let’s have a quick look at a possession after the taxes are due, possession date of Sept 1 2015. At this point, the property taxes for your new home have been paid in full for all of 2015 but of course the seller doesn’t live there for September – December so now you will owe the seller some money when your lawyer does the closing. Again, using $3,000 ($250/month), you would owe the seller $250 x 4 months so $1,000. Just as before, the lawyer would do the adjustment and instead of taking $1,000 off the purchase price, he’d forward and additional $1,000 to the seller. If you are paying through the lender, you will still make tax payments along with your mortgage payment and end up ahead for the next year and if you are on TIPPs, you wouldn’t make another payment until January of the upcoming year.
I am sure this is as clear as mud to everyone. I know it took me a few times to really understand it. I just wanted to be sure everyone was aware of what happens with property taxes when they buy a home. Remember that each City/municipality has a different due date for their yearly property taxes and some do not offer a TIPPs program such as Brandon. There are also some banks that will not allow you to pay your own taxes if you put only 5% down as they want to minimize their risk by collecting tax payments on your behalf to be sure that they are paid on time.
If you have any questions at all about property taxes, please don’t hesitate to give me a call.
Naomi Hamm, Mortgage Broker & Partner
Office: (204) 727-2177
Cell: (204) 724-7290