Property Taxes and Escrow Accounts
Property tax is a levy paid by an individual or entity on owned property. This tax is an “ad valorem” tax, meaning it is 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?
Property taxes and real estate taxes are essentially the same. The term “real estate tax” specifically refers to a tax on owned real estate. These terms can usually be used interchangeably unless referring to personal property tax, which includes movable assets like cars, boats, and planes, but excludes homes or real estate.
Paying Property Taxes
Most property tax payments are included in the homeowner’s monthly mortgage payment, making them easier to manage. Mortgage servicers often collect these tax payments in monthly installments and place them into an escrow account. When the property tax installment is due, the mortgage servicer pays it directly from the escrow account on behalf of the homeowners.
Most municipalities organize their real property taxes so that they are paid in arrears. This means that the state, county, or city bills a homeowner during the current year for property taxes attributable to the previous year.
The Effect of Divorce on Property Taxes
One of the most often overlooked areas of real property in divorce is the existing tax liability, which may actually be a joint liability.
For example:
John and Jane jointly own the marital home and their divorce will be finalized in October 2022. Jane is awarded the marital home and, as the current owner, will be billed by her county for property taxes in 2023 for the 2022 tax bill. However, since John and Jane co-owned the home for 10 months of 2022, this tax liability should be addressed and prorated in the divorce settlement as a joint tax liability.
What Happens to the Escrow Account?
Escrow is a legal arrangement where a third party temporarily holds money or property until a particular condition is met. It is used in real estate transactions to protect both the buyer and seller throughout the home buying process. Throughout the mortgage term, an escrow account holds funds for paying future property tax bills and homeowner’s insurance.
Key Points to Consider During Divorce:
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Refund of Escrow Account Balance: 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 escrow account balance directly to John. If both spouses are co-borrowers, the refund would be payable to both parties.
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Establishing a New Escrow Account: If Jane is refinancing the existing mortgage into her name, the mortgage lender may require her to establish a new escrow account to satisfy the upcoming tax bill, which 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. The settlement orders should address that John will sign over the escrow refund account to Jane, etc.
The Impact of Property Tax Exemptions
In some cases, homeowners can qualify for property tax exemptions, which can lower their property tax bills. Some common property tax exemptions are available for seniors, veterans, and homesteaders. These exemptions typically reduce, but do not eliminate, property taxes. Homeowners should research any available property tax exemptions with their local taxing municipalities.
Conclusion
Understanding property taxes, their implications during divorce, and the importance of addressing escrow accounts in settlement agreements is crucial. Overlooking these factors can lead to conflicts and frustrations post-divorce. Working with knowledgeable professionals, including Certified Divorce Lending Professionals (CDLP®), can help divorcing homeowners make informed decisions regarding their home equity solutions and mortgage financing.
