Property tax prorations are among the most important financial adjustments made at closing, and title companies play a critical role in ensuring that taxes are prorated accurately and fairly. Unlike some states where taxes are paid in real time, Illinois property taxes are paid in arrears. This means that each year at tax time, homeowners pay for the previous year’s taxes.
At a property closing, the final tax bill for the year typically isn’t available yet, so buyers and sellers must estimate the tax and negotiate a property tax proration. In this article, we’ll dive into more about what exactly property tax prorations are, why they matter, how they’re calculated, common challenges, and the role your title company plays in ensuring everything goes smoothly.
What are property tax prorations?
Although the process can differ depending on state or local tax systems, property tax prorations are commonly used to divide tax responsibility between the buyer and seller of a home. The amount is calculated based on the closing date, with the seller crediting the buyer at closing for their share of any unpaid taxes. This ensures fairness, since the buyer will ultimately pay the full prior year’s tax bill — even for the period before they owned the property. Having an accurately calculated tax proration is important for budgeting, closing disclosures, and preventing disputes after closing.
How property tax prorations are calculated
Property tax prorations are calculated by taking the most recent, full-year tax bill amount and dividing the annual bill by 365 days to establish a daily rate. The number of days each party owns the property in the current calendar year is calculated using the closing date as the official date of transfer, and the amount for the buyer and seller is calculated using the daily tax rate multiplied by the number of days in possession.
For example, if annual taxes are $12,000 and the closing date is September 30, the seller is responsible for January 1 through September 30, while the buyer covers October 1 through December 31. If the taxes have not yet been paid, the seller will usually provide a credit to the buyer at closing for their portion, since the buyer will pay the full bill when it comes due. If the taxes have already been paid, the buyer may instead reimburse the seller for the buyer’s share of the time they will own the property.
The title company’s role in tax prorations
The title company plays a critical role in tax prorations, as they are responsible for reviewing current and prior tax bills and calculating each party’s share. To do this, the title company:
- Reviews current and prior tax bills.
- Determines whether taxes are paid, unpaid, or need to be estimated.
- Calculates each party’s share of the taxes.
- Coordinates with attorneys, lenders, and real estate agents.
- Reflects accurate prorations on the closing statement.
Throughout this process, accuracy and compliance are critical. Title companies rely heavily on tax records and municipal data to ensure calculations are correct, fair, and up to date.
Common challenges in tax prorations
Tax prorations aren’t always straightforward. Several issues can complicate the process, including:
- Missing or incomplete tax information.
- Incorrect or expired exemptions (such as homeowner exemptions).
- Property reassessments after the sale.
- New construction properties with no prior tax history.
- Delinquent or unpaid taxes.
- Variations in local tax cycles.
Experienced title professionals help identify and resolve these challenges early, reducing the risk of costly errors or delays at closing.
Cook County and Chicago property tax proration considerations
To account for potential increases in property taxes, many transactions in the Chicago area use a prorated amount that exceeds the last known tax bill. For example, taxes are often prorated at 105% to 110% of the most recent full tax bill. This creates a buffer for rising assessments or tax rates. It’s almost important to note that this is a common local practice — not a legal requirement.
In some cases, there are still discrepancies between the actual taxes and the estimate created for the property tax proration. This is especially possible during years of cyclical property value reassessments, wherein local authorities update a property’s assessed value for tax purposes or upon the sale of the property, or with new construction properties. With new construction, for example, property value will change significantly from the time that the property is undeveloped land to when your new home is built.
Buyers should be aware of potential supplemental tax bills that may arrive after closing, as well as escrow holdbacks that lenders or title companies may use to account for possible increases. Because of these variables, it’s important to understand that prorations may be adjusted later to reflect the actual tax liability.
Work with Landtrust Title on your next closing
When handled properly, tax prorations protect both buyers and sellers from future financial issues. Working with experienced title professionals can make all the difference in achieving a smooth and successful closing.
If you have questions about what to expect when your real estate deal closes, Landtrust Title Services can help. Reach out to us today or by phone at 312.528.9210.