14 Rules Buyers Need to Know About Property Taxes - Part I

14 Rules Buyers Need to Know About Property Taxes
(references are to Orange County California websites)

Here is a summary of 14 things Buyers need to know about (Orange County California) property taxes as well as a full explanation of Number 1. As I post each subsequent item from this numbered list, I will return here and add links to the full information on each number.

As always, I welcome your comments and questions!!

1. Don’t assume your first tax bill will be paid in escrow
2. Expect a supplemental tax bill
3. Property taxes are late after April 10 and December 10
4. Property taxes are due whether or not you get a bill
5. Your tax amounts cannot be known to the penny at closing
6. You should take steps to estimate your tax amount and prepare for it
7. Taxes are made up of a base amount plus special taxes
8. Some special taxes are a percentage of value and some are fixed
9. Mello Roos taxes are not the only special taxes we see in OC
10. There are plusses and minuses of impounding your taxes with your payment
11. It’s free to file a homeowners exemption (and to file a homestead)
12. It’s amazing how much more house you can afford if you choose a lower tax area.
13. OC taxes are among the lowest in the US
14. Vote – many ballot propositions are linked to property taxes

1. 

1. Don’t assume your first tax bill will be paid in escrow
   
   There are so many costs associated with purchasing a home that it’s easy to assume that property taxes must be in there somewhere. (and there are costs of selling, too. Incidentally, these are two reasons it is rarely profitable to “flip” – that is, buy and quickly resell – a property. Capital gains taxes are another reason.) Buyers’ costs can be divided into non-reoccurring and reoccurring. Non-reoccurring costs are costs that can be linked to the purchase and are not ongoing. Some examples of non-reoccurring costs are a physical inspector, title insurance, escrow company fees, and lender’s fees. Reoccurring costs are those costs of which a certain time period’s share are prepaid at the closing and then will continue during your ownership. Examples of reoccurring costs are prepaid mortgage interest, prepaid HOA dues (sometimes for multiple associations), prepaid fire insurance premiums, and property taxes MAY be prepaid.
   
   But usually not! Let’s look at a timeline…
   
   January 1 – beginning of second half of property tax fiscal year
   February 1 – tax bills usually are mailed out by today (*see rule #4!)
   March 10 – one month until tax payment is late
   April 10 – pay property tax by today or be penalized
   July 1 – beginning of first half of property tax fiscal year
   August 1 – bills usually are mailed out by today (*see rule #4!)
   November 10 – one month until tax payment is late
   December 10 – pay property tax by today or be penalized
   
   If your purchase closes between January 1 and February 1 (or between July 1 and August 1), the seller’s share of the property tax for the period is going to be very small. Unless the seller can provide evidence that he has already paid the taxes (unlikely since they are not late until April 11 / December 11), the escrow company will most likely charge the seller for the number of days he owned the property and take the amount they charged him and “pay” it to you the Buyer, that is, put it in your debit column. You probably won’t “feel” it. It will be a small inflow of cash in a statement containing lots of outflows. But the idea is that you now have the seller’s share of the payment in your wallet. If you move into the property before February 1 (or August 1), it is likely you will receive the bill, which will probably still be addressed to the seller. So when the bill comes (and even if it doesn’t - see rule #4!), you must pay THE WHOLE THING.
   
   Of course, there are exceptions, such as when the seller is an overzealous taxpayer and has paid the whole thing already. If he can prove that to the escrow company, then they will charge you the large amount for your share as a closing cost and pay it to the seller who has already shelled out the payment. In that case, you will not need to pay the regular bill. But you should still go online (see how in rule #6) to verify the OC tax collector shows the regular bill as paid, and you should still expect a supplemental bill (see rule #2). If your purchase closes between February 1 and March 10 (or between August 1 and November 10), it is likely the seller has already received the bill, so you will most likely not see one. Nevertheless, the escrow company will probably handle the charges and credits the same way they would’ve handled it if you had closed between 1/1 and 2/1 (or 7/1 and 8/1), charging the seller and debiting you, and thus expecting you to pay the whole thing, just as in the previous paragraph. You are responsible to pay it even though you most likely won’t get a bill. If your taxes are impounded with (included as part of) your monthly loan payment, the bank should take care of it… but you should call them to be sure!!
   
   If you close between March 10 and April 10 (or between November 10 and December 10), the escrow company is likely to charge both you and the seller and send the whole payment to the county, unless the seller can prove he has already paid it. If the seller can’t provide proof, but claims he did pay it, the escrow company will most likely still charge everyone and pay, but then refund the overage to the seller if it turns out after the fact that it really had already been paid. Point is, you will likely see a CHARGE (a minus) for taxes on your closing statement rather than a DEBIT (a plus). NEVERTHELESS!!! You should still go online to verify on April 8 (or Dec 8) that the amount has been paid and prepare to pay it if it shows unpaid unless you can definitively know beyond a shadow of a doubt that escrow has paid it (asking escrow never hurts). Penalties for paying late are just too hefty. Better to pay twice and get a refund than pay late.
   
   If you close between April 10 and July 1 (or between December 10 and Jan 1), then the Seller should have paid the most recent property tax due before the close of escrow. You can go online to verify the bill has been paid.

So stay tuned for the full explanation of #2: Expect a Supplemental Tax Bill.