Legal Talk

THE RUNDOWN ON REAL ESTATE PROPERTY TAXES

How is the payment of real estate taxes handled when property is bought and sold?

BY: WILL MARTIN, GENERAL COUNSEL

North Carolina law provides that property taxes on real property being sold are prorated between the seller and buyer of the real property on a calendar-year basis unless otherwise provided by contract. According to the terms of the standard Offer to Purchase and Contract (jointly approved by the NC Association of REALTORS® and the NC Bar Association), the real property taxes are prorated on a calendar year basis as of the date of settlement. "Settlement" is defined in the contract as the proper completion and delivery to the closing attorney of all required paperwork and all funds necessary to complete the sale. The seller pays the taxes from January of the current year through the settlement date, and the buyer pays the taxes from the settlement date through the end of the year.

Cities and counties in North Carolina operate on a fiscal year that begins on July 1, so tax rates are established by the tax office in the middle of the year. However, the tax rates are applied in a calendar-year manner. For example, by July 1, 2017 a county sets its tax rate at fifty cents per $100 in value. The owners of property as of January 1, 2017 receive the tax bill sometime in August 2017. Taxes are due and payable September 1, 2017 and may be paid without interest through January 5, 2018.

If, at the time of settlement, tax rates haven’t been established and bills haven't been sent, taxes are usually prorated based on the prior year’s taxes. The closing attorney calculates the seller's portion of the taxes based on the number of days that the seller has owned the property during the current calendar year, and the buyer is given a credit for that amount on the settlement statement. In this case, since the buyer received a credit at settlement, the buyer is responsible for paying the entire tax bill when it is sent later in the year. The closing attorney may have the parties sign an agreement to adjust the taxes between them if the tax bill is significantly different than the previous year's bill, on which the proration was based.

If the tax bill has been sent by the tax office but the bill has not yet been paid by the seller, taxes are prorated at settlement and paid to the tax office. If the tax bill has already been paid by the seller, taxes are prorated and the seller is given a credit for the buyer’s portion of the taxes on the settlement statement.

Some properties (such as properties being used for the production of agricultural, horticultural or forest products, or unoccupied property in a builder’s inventory) are specially assessed and taxes deferred. The sale of such a property can result in changes in the tax status and cause deferred taxes to become due. Real estate agents are not trained or licensed to provide legal or tax advice, so a seller should consult with the tax office and/or seek the advice of a lawyer or other tax professional regarding the tax consequences of selling the property. The seller is obligated to pay any deferred, discounted or rollback taxes according to the Offer to Purchase and Contract. 

The information in this article has been taken from the Buyer and Seller Advisories, which are available to NC REALTORS® online at ncrealtors.org

ABOUT WILL

Will Martin is a graduate of Washington College in Chestertown, Maryland and Wake Forest University School of Law, where he graduated with honors in 1985. He practiced law in his hometown of Mocksville and then in Winston-Salem before coming to work for NC REALTORS® in 1996 as its general counsel. For the past 21 years, Martin has advised NC REALTORS®'s leadership and staff on a wide range of legal matters. He handles a large number of inquiries from individual members and local associations of REALTORS® on legal issues affecting the practice of real estate brokerage and association administration, and has been closely involved in the development of most of the NC REALTORS® standard forms. Martin is a Member/Manager of Martin & Gifford, PLLC.

Will Martin General Counsel