Category: Resources

TAX PRORATIONS IN A REAL ESTATE CLOSING: AN EXPLANATION BEHIND THE EQUATION.

TAX PRORATIONS IN A REAL ESTATE CLOSING: AN EXPLANATION BEHIND THE EQUATION.

If you are buying or selling a house, one of the more complicated issues you may encounter is the real estate tax proration.  Properties in Illinois are subject to taxes set by the county in which the real estate sits.  The paid taxes are distributed to the local government.

Real estate taxes are paid in “arears.”  This means that in the year 2021, you are paying the taxes for the year 2020.  Tax bills are payable twice a year in two installments.  If your property taxes are $2,000 per year, you receive a bill for $1,000 generally due in June, and a bill for $1,000 generally due in September.

If you are buying or selling a house, the taxes should be prorated based on the amount of time the seller lived in the house prior to the sale.  In other words, the buyer should not have to pay property taxes during the time that the seller occupied the property.

A tax proration is not necessarily a difficult calculation.  But it can seem tricky without an understanding of the underlying equation.

First, most real estate purchase contracts prorate taxes at a rate of 105%.  This is because taxes generally increase each year.  A higher percentage is better for the buyer because it causes the seller to pay a larger credit to the buyer for past taxes.  In some counties, such as Cook County, a proration of 110% is standard because taxes tend to increase in Cook at a faster rate than in other Illinois counties.

For example, if you are buying property in an Illinois county other than Cook, the real estate taxes on the property you plan to purchase may be $2,000 per year.  To calculate the taxes to be prorated, multiply the yearly taxes by 105%.  Then, divide that number by the number of days in the year.  The sellers should be responsible for the amount of unpaid real estate taxes for the number of days that they lived in the property prior to the sale date.

The equation is as follows:

$2,000 in real estate taxes per year;

x 105% = $2,100;

$2,100 / 365 = $5.75 per day in taxes.

 

Assume that the closing transaction occurs on March 31, 2021.  Remember that the property taxes due in 2021 are actually paying the taxes from the year 2020.  As a result, the seller should provide the buyer a credit for the entire 2020 taxes when the seller lived in the property.  The seller also needs to provide the buyer with a credit for the portion of the 2021 year that the seller continued to occupy the property.

For the year 2020 taxes, the seller would owe the buyer a credit of $2,100 ($2,000 x 105%).  In addition, the seller owes the buyer a credit for the time the seller lived in the property in 2021 – January, February, and March.

The daily property tax amount is multiplied by the number of days in January, February, and March: $5.75 x 90 = $517.50.  The total credit that the seller must provide to the buyer would be the $2,100 in unpaid taxes for the year 2020, plus the $517.50 for taxes in the year 2021 when the seller occupied the property, or $2,617.50.

As a result, when the buyer pays the year 2021 property taxes in 2022, the buyer is only paying for the portion of 2021 that the buyer lived in the property.

The following is another example.  Seller and buyer agree to a closing transaction on July 31, 2021.  Seller already received the bill for the 1st installment of the 2020 taxes and made a timely payment in June 2021.  This payment covered the taxes through June 2020.  But seller still lived in the property from July 2020 to December 2020, and until July 31, 2021.

As a result, and at a 105% presumed increase, the equation would look as follows:

$2,000 in real estate taxes per year;

$1,000 was already paid by the seller for the first installment of the year 2020;

$2,000 – $1,000 = $1,000 x 105% = $1,050;

$1,050 / 365 = $2.88 per day in taxes;

$2.88 per day * 214 days that the seller lived in the property for the year 2020 (sub-total $615.62);

plus $2.88 per day * 182 days that the seller lived in the property for the year 2021 (sub-total $1,046.50);

with a total of $1,662.60 owed as a credit to the buyer at the closing.

If you are buying or selling a home, local attorney Andrew Szocka provides thorough and speedy real-estate assistance in the Chicagoland area.  To schedule a free initial consultation, visit Andrew Szocka, P.C. online or call the office at (815) 455-8430.

 

REO CLOSINGS: WHAT ARE THEY AND HOW DO THEY DIFER FROM A TYPICAL REAL ESTATE TRANSACTION?

REO CLOSINGS: WHAT ARE THEY AND HOW DO THEY DIFER FROM A TYPICAL REAL ESTATE TRANSACTION?

If you plan to purchase real estate via an REO Closing, you should know what to expect and the differences between an REO Closing and a “regular” buy-sell property transaction.

“REO” stands for “real estate owned.”  This term describes a class of real property that is typically owned by a bank or government funded agency.  Fannie Mae and Freddie Mac are two of the most well-known government funded entities (referred to as “GFEs”) and they act as an investor on many loans provided in the United States.  As the investor behind a loan and under Illinois law, GFEs also own the mortgages that secure their investment loans.

Next, it is important to understand the difference between a “lender,” “investor,” and companies that are referred to as mortgage “servicers.”  The lender is the bank that gives the original loan, but then typically sells that loan to a GFE or other investor.  As a result, most loans are owned by GFEs or large banks that operate as investors.  The servicer is a company that is paid to temporarily hold the mortgage that secures the loan.

When an individual does not pay back a loan used to purchase or re-finance a home, the mortgage that secures the loan can be foreclosed.  The foreclosure action is brought by the servicer.  A completed foreclosure results in a foreclosure sale where the property is sold, usually back to the investor.

The investor then proceeds to sell the home to an independent third party.  This process is a REO Closing, and as a home buyer you may be that independent third party.  There are some important differences between and REO Closing and what one may consider a “regular” transaction to buy or sell a house.

First, a typical Illinois closing uses the most recent version of the Illinois Multi-Board Residential Real Estate Contract (the “Illinois Contract”).  This contract is designed to be generally fair to both the property’s buyer and seller.

At an REO Closing, you will likely be required to sign the investor’s contract.  An investor contract is generally more favorable to the investor than the individual or entity purchasing the property.  Although each investor’s contract is different, most have terms that protect the investor in three key areas: 1) the return of earnest money, 2) the level of title insurance provided, and 3) the condition of the purchased property.

 

First, with a “regular” closing pursuant to the Illinois Contract, the party that breached the contract is required to refund, or faces forfeiture, of the earnest money.  An investor contract may not provide a buyer with an opportunity to obtain an earnest money refund if the REO Closing is not successfully completed.

Second, be aware of the level of title insurance that the investor/seller is providing.  A typical Illinois Contract requires the seller to purchase an owner’s policy of title insurance for the buyer.  But as with all insurance, some policies are better than others.

Many investor’s contracts require the investor/seller to purchase only “basic” title insurance for the buyer.  This differs from an Illinois Contract which requires the seller to provide an “extended” title insurance policy.

The main difference between a basic and extended title insurance policy is that an extended policy insures over liens, easements, and encroachments that are not part of the public record.  A basic policy does not.  The cost to purchase a basic policy is cheaper than an extended policy, which is why the investor/seller may include this provision in an REO Closing contract.

Finally, it is likely that the investor’s contract will make no warranties or guarantees as to the condition of the property.  The investor has not lived in the property prior to its sale.  As a result, the investor is unlikely to provide any warranties as to the property’s condition.

If you are thinking about entering into an REO Closing contract, local attorney Andrew Szocka provides thorough and speedy real-estate assistance in the Chicagoland area.  To schedule a free initial consultation, visit Andrew Szocka, P.C. online or call the office at (815) 455-8430.

 

SLANDER OF TITLE: YOUR PROPERTY’S TITLE HISTORY CAN BE PROTECTED.

SLANDER OF TITLE: YOUR PROPERTY’S TITLE HISTORY CAN BE PROTECTED.

If you are an individual who owns real estate in Illinois, you should be aware of your property’s title history.  The title history is a list of all documents recorded against the property in the county where the property sits.

Recorded documents are submitted to the county’s Recorder’s Office and are assigned a document number.  Documents recorded against your property are usually available to view on your county Recorder’s website.

A typical title history for a residential property likely includes only deeds and mortgages.  For example, when one party sells a house, they convey it to another party with a deed.  The party buying the house may get a mortgage that secures the loan used to buy the house.  In this case, the mortgage is recorded against the property in favor of the lender that loaned the other party the money to purchase the home.  When the property is sold again, the previous mortgage is usually paid off and released.  In this way, a title history may only reflect a series of deeds, mortgages, and released mortgages.

But not all title histories are clear.  It is possible for someone to record a document against your property with bad intent.  Illinois courts may consider this a “slander” of your property’s title and award monetary damages.

Slander of title generally occurs when someone maliciously records a false document against your property’s title.  If you are damaged by this recording, you pay to have it removed, or it affects your ability to sell the property, you may be entitled to damages.

An Illinois court may even award damages that are punitive, or meant as a punishment, against the person who slandered title.  This depends on the level of maliciousness of the individual who slandered title and the damage actually done to your property’s title.

For example, many people have disputes with creditors.  If you pay what is owed and the creditor still records a lien against your property, the creditor may be slandering your title.  More common is a dispute with an acquittance or relative when they record a deed that affects your property and purports to convey it to somebody else.

As a result, it is prudent to periodically check your title history.  If you believe someone recorded an inappropriate document against your property, local attorney Andrew Szocka provides thorough and speedy real estate help in the Chicagoland area.  To schedule a free initial consultation, visit Andrew Szocka, P.C. online or call the office at (815) 455-8430.

 

PROPERTY OWNERSHIP: THE OPTIONS AND ASSOCIATED ADVANTAGES.

PROPERTY OWNERSHIP: THE OPTIONS AND ASSOCIATED ADVANTAGES.

If you are an individual who owns real estate in Illinois, you may have questions about how your ownership is classified under Illinois law.  Illinois has many categories of land ownership, and each may have advantages or disadvantages depending on your situation.

The most common types of real estate ownership are 1) Individually, 2) Tenants in Common, 3) Joint Tenants, 4) Tenants by the Entirety, and 5) in a Trust.

An individual with property is probably the simplest form or ownership.  However, this form of ownership does come with potential complications.  If you own property individually, you may have been conveyed the property in “Fee Simple,” or as a “Life Estate.”

Fee simple ownership provides absolute control.  Your rights to the land are indefinite and can be conveyed at any time and by any means.  If you were granted only a Life Estate in property, your ownership rights are more limited.  Upon your death, the property will revert back to another individual or entity, often called the “remainderman.”  As a result, almost all property transactions made by the owner of a Life Estate interest must be approved by the remainderman.

Just as common as individual ownership is ownership by two or more people who own together as a group.  This is when the distinction between Tenants in Common, Joint Tenants, and Tenants by the Entirety is important.

Tenants in Common own portions of property.  If there are two Tenants in Common, each generally owns one half of that property.  Three Tenants in Common typically own portions of the property in thirds.  It should be noted that Tenants in Common can decide to own the land in any percentage they deem appropriate, e.g. 80%/20%, etc.

Upon the death of one Tenant in Common, his or her interest goes to the decedent’s estate.  For example, if A, B, and C own land as Tenants in Common with equal interests, and C dies, the property is now owned a third by A, a third by B, and a third by C’s estate.

Joint Tenants own land in a significantly different manner than Tenants in Common.  The most important distinction is called the “Right of Survivorship.”  If two Joint Tenants own property, and one dies, the whole land automatically transfers by operation of law (no written deed required) to the other Joint Tenant.

Tenants by the Entirety are similar to Joint Tenants.  As with Joint Tenants, Tenants by the Entirety enjoy the Right of Survivorship.  When one Tenant by the Entirety dies, the land automatically goes to the other Tenant.

But there are unique characteristics of Tenants by the Entirety.  First, it is only available to married couples.  Second, spouses are protected from certain creditors if they own property as Tenants by the Entirety.  If one spouse owes a debt to a creditor that is solely in his or her name, the creditor cannot attach a judgment for that debt to the other spouse’s interest in the property.  As a result of these benefits, many married couples prefer to own property as Tenants by the Entirety.

Finally, real estate can be owned in a Trust.  You can convey real estate into a Trust during your lifetime, or your Last Will and Testament can convey the property into the Trust at your death.

The advantage of putting real estate in a Trust can be significant.  Illinois law requires all estates that own land to go through a process called “Probate.”  This is procedure when a court appoints someone to distribute the property owned by your estate.  Probate can be a relatively long and expensive process.  Estates without real estate may be exempt from Probate, saving time and money.

If you are interested in learning more about options regarding ownership of your real estate, or whether keeping property in a Trust is appropriate, local attorney Andrew Szocka provides thorough and speedy real estate and estate planning help in the Chicagoland area.  To schedule a free initial consultation, visit the Law Office of Andrew Szocka, P.C. online or call the office at (815) 455-8430.