If a seller has already paid the property taxes for the entire year, what happens to the amount covering the period after the home is sold? And why might a buyer need to bring additional funds on closing, beyond the down payment, land transfer tax, and legal fees?
The answer may be a property tax adjustment.
What Is a Property Tax Adjustment?
A property tax adjustment is not an additional tax or fee. It ensures that the buyer and seller each pay the property taxes for the period during which they own the home.
In a typical Ontario real estate transaction:
- The seller is responsible for property taxes up to and including the day before closing.
- The buyer becomes responsible for property taxes starting on the closing date.
The lawyers calculate each party’s share and include the adjustment in the final closing figures.
How Does a Property Tax Adjustment Work?
Let’s look at a simple example.
Assume that:
- The annual property taxes are $5,000.
- The closing date is July 31.
- The year has 365 days.
The seller owns the property from January 1 through July 30, a total of 211 days. The seller’s share of the annual property taxes is approximately $2,890.
The buyer is responsible from July 31 through December 31, a total of 154 days. The buyer’s share is approximately $2,110.
What If the Seller Has Already Paid the Full Year?
If the seller has already paid the full $5,000, they have effectively prepaid approximately $2,110. on the buyer’s behalf.
On closing, the buyer reimburses the seller for this amount. It is added to the balance the buyer must provide and credited to the seller on the Statement of Adjustments.
For the seller, this means that property taxes paid for the period after closing are not lost. The prepaid amount is normally recovered as part of the closing transaction.
What If the Seller Has Not Paid Enough?
If the seller has not yet paid the property taxes, or has paid less than their share, the lawyers calculate the outstanding amount for the seller’s ownership period.
That amount is generally deducted from the money the seller receives on closing and credited to the buyer, who will then be responsible for paying the applicable property tax bill.
What Buyers Should Know
When preparing funds for closing, buyers should budget for more than the remaining down payment, land transfer tax, and legal fees.
If the seller has prepaid the property taxes, the buyer may need to reimburse the seller for the portion covering the period after closing. This adjustment can be significant, particularly when a home closes later in the year.
It is not a duplicate payment. It is simply the buyer’s share of the annual property taxes.
What Sellers Should Know
Sellers should provide their lawyer with the latest property tax bill and proof of any payments made.
If the seller has prepaid property taxes beyond the closing date, the buyer will generally reimburse that amount on closing. If the seller has not paid enough, the shortfall will normally be deducted from the seller’s proceeds.
Review the Statement of Adjustments
The property tax calculation will appear on the Statement of Adjustments prepared for closing.
Before the transaction closes, buyers and sellers should review:
- The total annual property tax amount
- The closing date
- The amount already paid
- The number of days allocated to each party
- The final credit or debit
If any information appears incorrect, contact your real estate lawyer before closing.
The Simple Explanation
The seller is responsible for property taxes before closing, and the buyer is responsible starting on the closing date. If one party has prepaid the other party’s share, that amount is reimbursed on closing.
If you are planning to buy or sell a home in Oakville or the West GTA, Call or text THE FISHER GROUP at 647-598-8488. We'll help you understand the process and prepare for a smooth closing.
This article is provided for general informational purposes only and does not constitute legal, tax, or financial advice. Property tax adjustments may vary depending on the transaction. Please consult your real estate lawyer regarding your specific closing.
