In the City of Chicago, property taxes are paid in arrears. This means that property tax amounts are due the year after the tax year has passed. When a Buyer and Seller are working on their property sale, the property tax proration is a negotiated term. Because taxes are paid in arrears, the parties will not yet have received the property tax bill for the current year by the time of the closing. With each subsequent year, taxes go up. For this reason, the seller will usually pay 105+% of the previous year’s tax bill.
Here’s an example:
Let’s say a real estate sale is set to close this year (before July 1). This means that there will be a tax obligation for property taxes from 2019 and 2020.
We know that the 1st installment of the year’s taxes will be 55% of the last known full year. To determine the amount of the last full year if you do not have access to the Cook County Treasurer’s website, divide the installment by 55%. For an easy calculation:
Parties have agreed to a 110% proration rate for the 2nd installment of 2019 and for 6 months in 2020. The 1st installment $5,000.00 has been paid. Using the calculation above, the full, known total for 2018 taxes were $9,090.90.
To determine the credit for the 2nd installment is: $9,090.09 x 110% = $9,999.99 less the 1st installment ($5,000.00) = $5,000
To determine the credit for 2020: $9,090.90 x 110% = $9,999.99/366 days = $27.32 per diem x 182 days in 2020 = $4,972.24
This example illustrates the tax proration rate of 110%. However, this is a negotiated term and depending on the circumstances, it may be appropriate to ask for more. An attorney can facilitate this negotiation. The higher the tax proration rate, the better the deal will be for the Buyer.
