Navigating Property Tax Prorations and Post-Closing Bills in California Real Estate Sales (And a Recap On Property Taxes in California)

This article will explore the basics of California property taxes, how those are prorated in a sale, and the post-closing “Supplemental Property Tax” bills new owners often receive.

Property Tax Proration in a real estate sale is to fairly divide the property’s taxes due or paid, between the Seller and Buyer, so that each party is paying only for those days which they actually own the property. The standard form California Association of REALTORS? Purchase Agreement calls for proration of Property Taxes. For higher value properties such as those in Newport Beach, Costa Mesa and many Orange County communities and elsewhere, property taxes can be substantial and worth ‘double checking’ to ensure they are properly prorated.

Understanding Property Taxes

In all California counties, the base property tax is 1% of the current owner’s tax basis, which is based on the fair market value at the time of purchase.

As all California homeowners should appreciate, under Proposition 13, the increase in assessed value of real property for property tax purposes (i.e. your property tax bill) is capped at 2 percent annual increases, regardless of the actual increase in the property value. Thus if your property tax bill in Newport Beach is $3,200 while your property is worth, on paper, over $4 million, that is due to the protections of Prop 13 (otherwise, that $4 million house, if assessed at fair market value, would have a current property tax bill of $40,000, i.e. 1% current Orange County property tax tate).

Thus the Buyer of real estate will almost always certainly have a much higher property tax bill than the Seller’s current rate. (Certain exclusions to property tax reassessments exist such as, broadly, each with their own rules: parent to child or parent to grandchild, under limited criteria, per?Proposition 19 ; spouses; dissolution;?cotenants ; joint tenancy; into trusts or LLCs with the same ownership [note that LLCs are treated differently thereafter for reassessment purposes and have some potential benefits in this arena]; and some other situations.)

The tax year runs from July 1 of any year to July 1 of the following year. It does not follow the standard calendar year.

For example, a tax year might be described as the 2023-2024 tax year, meaning the time period from July 1, 2023 to July 1, 2024. The 1st Tax Installment is the time period between July 1 and January 1.

The tax payment is due November 1 and delinquent after December 10. The 2nd Tax Installment is the time period between January 1 and July 1. The tax payment is due February 1 and delinquent after April 10.

Broken down, this means you have until the last date to make those payments, i.e., for the 2023-2024 tax year, that means December 11, 2023 and April 10, 2024, respectively.?If mailing, payments must be received or postmarked by the last payment date to avoid late penalties. Newport Beach and Orange County residents, you can even sign up for text or email reminders through the county at octreasurer.com/securedreminders .

Additional information from the Orange County Assessor’s Office can be found here:?https://www.ocgov.com/business/taxes-assessments

Understanding Property Tax Prorations

The Seller is only responsible for making tax payments that come due during the time period that the Seller owns the property. On the day of closing, the Buyer is the owner of the property, and the Buyer is responsible for tax bills that come due on or after that date.

All prorations are based on the Seller’s current rate; the Buyer is then responsible for the increased amounts upon their ownership.

If the Seller has not yet made a payment which is due, the Seller is charged with the amount of the installment and the escrow company will often then make the tax payment as part of the sale. In that event, the Buyer is then debted (i.e. effectively reimburses the Seller) for some prorated amount based on the anticipated close of escrow date (if the close of escrow date is later changed, the escrow company will readjust the proration).

If the property tax payment is not going to be made as part of the sale, then the Buyer will receive a credit from the Seller for the prorated amount, and the Buyer will then be responsible for the payment.

If the lender in the transaction requires that a future tax payment be made, this payment is a charge to the account of the Buyer.

Post Closing “Supplemental Property Tax Bill”

After closing, the Buyer will often then receive a “Supplemental Property Tax Bill” to make-up for the difference in the lower tax amount the Seller was paying, and the new, higher amount the Buyer (now current owner) is paying. This is also prorated by the County based upon the closing date (i.e. the day you close, the property taxes go up, and if a payment was already made based on the lower amount, then a “Supplemental Property Tax Bill” will be issued to account for the difference).

All Buyers must keep an eye out for any correspondence from the County Assessor’s Office.

Frustratingly, many counties view the bills as courtesy reminders only. Thus it may behoove you to check the County Assessor’s website (most Counties display this information publicly) periodically after a sale to ensure no outstanding taxes are owed, and to certainly calendar February 1 and April 10 of each year as the last days to make the respective tax payments.

Here is the Orange County Assessor’s website where you can view property taxes for Orange County properties such as Newport Beach and Costa Mesa:?https://tax.ocgov.com/tcweb/search_page.asp . You can easily locate other County Assessors’ websites online.

Indeed we have clients who never received a bill in the mail, and then were charged late fees and penalties for missed property tax payments.

– Devin Lucas

Author Devin R. Lucas is a Real Estate Attorney, Broker and REALTOR?, specializing in Newport Beach, Costa Mesa and Orange County coastal communities, including in matters of California property tax reassessment rules for family transactions, serving individual, trustees and investors in residential real estate.

Lucas Real Estate – Attorney Devin Lucas and CPA Courtney Lucas – are experts in residential real estate sales in Newport Beach, Costa Mesa and Coastal Orange County, real estate tax and property tax considerations, Trustee representation, family sales, and California’s Proposition 19.

Tax or Legal Questions??– Paid one-hour confidential legal consultations are conducted daily via Zoom and address virtually all questions, options, tax implications and strategies. (Book a consultation here. )

Questions about a potential open-market home sale or purchase??–?contact us anytime via phone (949-478-1623) or email ([email protected] ).