Property Taxes and Escrow Accounts
What is property tax?
Property tax is paid by an individual or entity on an owned property. Property taxes are a type of “ad valorem” tax, which means they are based on the assessed value of real property and some tangible personal property, such as boats or cars.
Property Taxes Vs. Real Estate Taxes: What’s the Difference?
Essentially, property taxes and real estate taxes are the same thing. The term “real estate tax” refers to a tax on owned real estate. Real estate tax and property tax can usually be used interchangeably unless you are talking about personal property tax. Personal property tax includes movable assets like cars, boats, and planes but excludes homes or real estate.
Paying Property Taxes
Most property tax payments are part of the homeowner’s monthly mortgage payment, making them easier to pay. This is because mortgage servicers often collect the tax payment in monthly installments as part of the mortgage payment and it’s put in an escrow account. When the property tax installment is due and payable, the mortgage servicer will pay directly on behalf of the homeowners using funds from the established escrow account.
Most municipalities organize their real property taxes so that they are paid in arrears. This does not mean that the payments are not timely. Rather, it means that the state, county, or city, bills a homeowner during the current year for property taxes that are attributable to owning the house in the prior year.
The Effect of Divorce
One of the most often overlooked areas of real property in divorce, is the existing tax liability that may in reality be an existing joint liability.
John and Jane jointly own the marital home and their pending divorce will be final in October of 2022. Jane is awarded the marital
home and as the current owner, she will be billed by her county for property taxes in 2023 for the 2022 tax bill.
But if John and Jane co-owned the home for 10/12’s of 2022, shouldn’t that tax liability be addressed and prorated in the divorce settlement as a joint tax liability?
What happens to the Escrow Account?
Escrow is a legal arrangement in which a third party temporarily holds money or property until a particular condition has been met. It’s used in real estate transactions to protect both the buyer and seller throughout the home buying process. Throughout the term of the mortgage, an escrow account will hold funds for paying the future property tax bill and homeowner’s insurance.
A couple of important points to consider when divorce comes into play…
First, when the existing mortgage is paid in full whether the home is sold or refinanced by the retaining spouse, the mortgage servicer will refund the existing escrow account balance only to the mortgagee(s). If John was the only spouse on the existing mortgage, the servicer would refund the existing escrow account balance directly to John. If both spouses are co-borrowers, the refund would be payable to both parties.
Secondly, if Jane is refinancing the existing mortgage into her name, she may be required by the mortgage lender to establish a new escrow account in order to satisfy the upcoming tax bill, which as mentioned earlier should be considered a joint tax liability for the period of co-ownership.
Although the settlement agreement may specify which spouse should be awarded the balance of the escrow account, the mortgage servicer will not alter their payee. It would need to be addressed in the settlement orders that John would sign over the escrow refund account to Jane, etc.
Escrow account balances can grow to be pretty hefty in certain areas of the United States. And when they are left unaddressed in the divorce settlement agreements, the door is left open for more conflict and frustration post divorce.
The entire amount of the escrow account isn’t held just for the payment of tax liability—it also is accruing each month to cover the upcoming homeowner insurance premium.
What Are Property Tax Exemptions?
In some cases, homeowners can qualify for a property tax exemption, which is just one way taxpayers can lower their property tax bills. Some of the most common property tax exemptions are available for seniors, veterans, and homesteaders. These property tax exemptions will reduce, but don’t usually eliminate, property taxes. Homeowners should research any available property tax exemptions with their taxing municipalities.