Nothing is Certain but Death and Taxes

This title references a quote that is normally attributed to Benjamin Franklin.  The full quote, in a letter dated 1789 reads, “[o]ur new Constitution has been established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”

It is stunning to consider the extent to which we are taxed.  Let us focus on real estate property taxes and specifically, the potential issues that can occur around the time these taxes are due in most Virginia jurisdictions.

Property taxes are generally due twice a year; around June/July, depending on the jurisdiction and again in December.  It is also worth noting that property taxes are paid in arrears.  So, the June/July payment that one makes covers the period January 1 of that year until the end of June.  Additionally, Virginia Code 58.1-3340 states, “[t]here shall be a lien on real estate for the payment of taxes and levies assessed thereon prior to any other lien or encumbrance.”  In other words, the non-payment of property taxes creates a super senior lien on the real property.  Consequently, the payment of property taxes is an important consideration for real estate closings.  Title companies and lenders must be careful to confirm that such taxes are paid or will be paid.

When closings occur around the two times a year that property taxes are due, certain issues can arise.  In a recent correspondence from a prior client, we were informed that the client received a delinquent property tax notice from the County that dated back to the time the property was purchased, which was May of 2016.  Property taxes were coming due, but the County had not yet received payment.  Therefore, the property tax payment had to be handled at closing.  The options are generally two-fold: (1) remit the tax payment from the seller side of the transaction, have the buyer give a prorated credit to the seller from the date of closing forward until the last day of the tax bill period.  In this instance, the lender will typically only collect 2 months of property taxes in escrow because the taxes will have already been paid by the seller; or (2) the lender can collect approximately 7-8 months’ worth of taxes in escrow, evidencing its intent to pay the property tax bill coming due and the seller can give a prorated credit to the buyer at closing covering the seller’s period of ownership from the start of the billing period forward to the closing date.  Back to the example above, this client thought we did not pay the property taxes at closing.  However, a quick look at the settlement statement revealed that the client’s lender had collected 8 months’ worth of property taxes in escrow, clearing demonstrating their intent to pay it.  Incidentally, in the lender’s package at closing is a document called an Initial Escrow Account Disclosure Statement.  This will also detail payments to be made out of escrow and this client’s lender clearly indicated they would make the property tax payment for the period in question.

Property taxes are certain.  Ideally, confirming they have been paid or making proper arrangements for their payment at closing should also be.