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Illinois Property Tax – What’s the Deal?

If you’ve bought or sold a home in Illinois, you’ve probably been puzzled by the way property taxes are handled at closing.  The reason for the confusion is because in Illinois we pay property taxes “in arrears,” or, more simply, we’re paying last year’s taxes this year.  There’s a long, complicated history of Illinois taxes during the Depression, and part of it included Cook County not collecting property taxes in 1930.  We’ve been making up for that year ever since.

What this means is that when property is sold, they are taking the property subject to real estate taxes from the previous year through the date of closing.  Therefore, when someone closes on a home on March 31, 2017, there will be unpaid taxes from January 1, 2016 through March 31, 2017 that will be the responsibility of the new owner!  For this reason, an Illinois Seller gives the Buyer a credit for this amount at the closing.

There is added difficulty in that the 2017 tax bill is unknown.  In the example above, the 2016 tax bill will have been released, but the 2017 amount will not be determined until the following year.  Therefore, the Buyer is taking the property and the tax proration offered by the Seller without knowing the actual amount of the tax bill for 2017.  For this reason, our contract has the parties specify that the tax proration will be calculated at a certain percentage (most commonly in the Chicago suburbs, 105%) of the previous year’s tax amount, in an effort to account for any potential increase in property taxes.

So, practically, how does this work?  Let’s say the 2016 tax bill was $10,000.  In the example above, the Buyer would receive a credit for the entire 2016 tax bill ($10,000), plus 105% of the 2017 through the date of the closing.  To calculate the 2017 proration, 105% x $10,000 = $10,500 divided by 365 = $28.78 per day.  If the closing is on March 31, 2017 (the 90th day of the year), the tax proration would be $28.78 x 90 = $2,590.20.  Therefore, at the closing, the Seller will give the Buyer a tax credit of $10,000 for 2016 and $2,590.20 for 2017, for a total of $12,590.20.

What this means is that the Seller’s net proceeds will be reduced by this amount, and the Buyer’s funds needed to close will also be reduced by this amount.  While this is welcome news for most Buyers, listing agents and Sellers need to be aware and fully informed about the way the tax credit is calculated to avoid unwelcome surprises at closing.

There are other issues that may complicate the calculations, such as tax exemptions and freezes, and closings near tax installment deadlines.  Sellers who pay their property taxes through an escrow account may have additional questions.  The attorneys at Rosenberg & Parker, LLC are always happy to help answer your questions about calculating the tax proration and assist in preparing net sheets – please feel free to call or e-mail us anytime.

Heather Parker