The Property Tax adjustment at closing can catch some buyers off-guard, so this article will help buyers calculate how much they need to have in order to complete the transaction.
- (NOTE: The following information is based on the criteria: 1) A June 30th date for collecting Property Taxes as is the case for most of Alberta. 2) The mortgage is not PIT (Principal, Interest & Taxes) 3) The mortgage was not being assumed)
Property taxes for the full calendar year are to be paid by June 30th. They are payable 6 months in arrears, and 6 months in advance. An adjustment has to be made at closing in every case in favor of either the buyer or the seller (unless the transaction closes on December 31st)
There are 2 guidelines that you can remember:
1) If the sales closes BEFORE June 30th, the BUYER will receive a CREDIT for the amount of the year’s taxes which are owed, but haven’t been paid by the seller. This means the buyer doesn’t need as much money to complete the purchase. HOWEVER, the buyer will then be responsible for paying the taxes for the ENTIRE YEAR by June 30th.
2) If the sale closes AFTER June 30th, the SELLER will receive a CREDIT for the portion of the year’s taxes which are owed by the buyers. This is because the seller has prepaid them already. This means the buyer will need more money upfront in order to complete the purchase. However, the buyer will then not need to pay any more for that year’s property taxes.
Here are two Calgary based examples, one in favor of the seller and the other in favor of the buyer.
Closing Date: April 1st
Property Tax amount (current year) $1,500
Since the closing date is BEFORE June 30th, the BUYER will receive a CREDIT.
Calculation: 91/365 X $1,500 = $373.97
The ’91′ in the above example represents the number of days in the year that the seller owned the property and is therefore responsible for paying the taxes on it, out of the total 365 days of the year.
Jan (31 days) +Feb (29 days) +March (31 days) = 91 days
So the BUYER gets a $373.97 credit to complete their purchase, but must pay the entire year’s tax bill by June 30th.
Closing date: September 15th
Property Tax amount: $1200 (already paid by seller)
Since the closing date is AFTER June 30th, the SELLER will receive a CREDIT.
Jan(31) + Feb(29) + Mar(31) + Apr(30) + May(31) + Jun(30) + July(31) + Aug(31) + Sep(14 days only) = 258
Calculation: 107/365 X $1200 = $848.22
$1200 – $848.22 = $351.78 CREDIT to the SELLER since they paid in advance.
The BUYER will need another $351.78 to complete their purchase, representing the 107 days remaining in the year that is their responsibility to pay property taxes on, which have already been paid in advance by the seller. However, the buyer does not need to pay any more towards that year’s property taxes.
NOTE: The above scenarios and examples may not reflect your exact circumstances. Your lawyer will have the firm amount of your taxes owing when they receive the Statement of Adjustments from the sellers lawyer. To be 100% safe, have taxes set aside for the entire year.
TIPP (Tax Installment Payment Plan)
Calgary residents have the option of paying their property taxes monthly on a Tax Installment Payment Plan, or TIPP for short. Many homeowners choose this option rather than having to face one large bill every June 30th.
If the SELLER is on the TIPP program, it simplifies any property tax adjustment that needs to be made at closing. There will still be a slight adjustment because the amount paid under TIPP will not usually equal the true tax adjustment. However, since taxes under TIPP are paid “as you go” rather than the aforementioned “6 months in advance, 6 months in arrears”, the impact on the buyer’s closing costs / net sale proceeds to the seller, are quite minimal.
NOTE: If the new BUYER chooses NOT to go on the TIPP program and,
1) Sale closes BEFORE June 30th, they will have to pay balance of the years taxes by June 30th
2) Sale closes AFTER June 30th, they will have to pay balance of the years taxes when they become owner of the property.
Fore more information on the TIPP, please visit the City of Calgary website: click here