Iowa Tax Proration Credit – What You Need to Know!
Calculating real estate taxes when you when you sell a home in Iowa can be a complicated process. When you’re in the planning phase of selling the best estimate is to calculate paying one year’s real estate taxes at closing. This will give you a number close to what you will pay. Depending on the month you close on the home it could be a little more or a little less.
It would be easy to stop the explanation there, but let’s dig a little deeper. In Iowa, property taxes come due September 1st and March 1st. The taxes paid this year count toward the previous fiscal year, which always ends June 30. In another sense, if you live in Iowa you are always paying last year’s taxes.
On the day of closing, the buyer owns the property and is responsible for the tax bills that come due on or after that date. Since Iowa’s taxes are paid a year behind, the buyer is given a credit to cover the property taxes during the year they did not own the house. The seller gives the credit to the buyer for the time the seller owned the house and the taxes were accruing, but not yet payable. This happens on every real estate sale in Iowa. So yes, sellers pay property taxes usually equivalent to 9 to 14 month’s of taxes at closing depending on the date of closing.
BUT IF YOU HAVE BEEN ESCROWING FOR TAXES… Your mortgage company should be sending you a refund of the taxes they were escrowing because they have now been paid at closing.
Here is an example with a closing date of October 31st.
(The date of closing will always have an impact on what you pay as you will pay taxes up to the date of closing).
The first half of the real estate tax payment is due on September 1, 2012, and the second half on March 1, 2013. Since real estate taxes are paid a year in arrears in Iowa, that covers real estate tax payments from July 1, 2011 to June 30, 2012. (That’s the first confusing part, the tax year is not the same as a calendar year)
For a house closing October 31, 2012 the seller’s escrow company will have paid the first half of the 2011 payment on September 1, 2012. The second half of the yearly payment, (January through June), will need to be paid at closing PLUS a prorated amount for taxes due after June 30, 2012 and up to the day of closing.
For sellers that translates into a tax payment at closing of 10 month’s worth of taxes. October is a good month to close as it falls after the real estate tax payment made to County on September 1st. As you can imagine, a closing in August/September would look a lot different with that payment not made yet and taxes owed being nearly 14 month’s worth.