Understanding Pre-paid Property Taxes when Purchasing a Home

When a buyer buys a house there are often lots of questions about property taxes. Here is some information that I think you will find helpful. Please consult with your lender or CPA if you have specific questions about your purchase or loan. This information is for Southern California.

Property taxes are pre-paid 2 x a year to the County. We use the phrase “No Darn Fool’n ­Around” to remember when the property taxes are billed and when they are due: Billed in November, Due in December. Billed in February, Due in April.

•A. When you buy a house you will be asked to pre-pay property taxes. This amount not impounded because was technically on the previous billing cycle. Because you didn’t own the house when it was due, you did not pay them. The seller prepaid them and they will get reimbursed for the amount that was not used. Therefore, the balance now needs to be paid from the time you take ownership up until the next billing cycle. The amount you are paying is an estimated amount based on current tax record billings.

•B. If you have an impound account (which I recommend) you will still need to pay property taxes on your monthly mortgage payment even though you just pre-paid property taxes in Step A above. The amount you pay monthly to your lender will be used to pay for next property tax billing cycle.

•C. About 2 months after you own the house you will get a NOTICE OF SUPPLEMENTAL TAX BILL from the County. This is how the County notifies you of your exact new amount based on the sales price. If the new sales price is less than the previous price this will be good news because the bill will go down. It’s the opposite if you are paying more for your house than the previous owner did. Your lender will also get a copy of this supplemental bill and will make sure they have the correct amount impounded to pay the correct amount come April.

•D. When you pay your monthly mortgage payment to your lender, the amount allocated for property taxes will go into an interest bearing escrow account with the bank and will be set aside for when it is due. You will continue to get tax bills from the county and you will need to make sure that you lender has also received them. Your lender will make the payment electronically on the day it is due through your impound account.

•E. Every year your Mortgage payment will be adjusted to compensate for increasing or decreasing property taxes. You will also get IRS form 1098 from the bank for the earnings in your impound account. You will need to file this with your taxes.
In summary, you will need to have some money set aside when buying a house to pay for the prepaid property taxes. The amount collected in advance varies depending on the month you are buying, but should not exceed 6 months worth of taxes since they are due every six months.

Please consult with your lender or CPA is you have specific questions about your purchase.

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One thought on “Understanding Pre-paid Property Taxes when Purchasing a Home”

  • What are buyer closing costs and how much are they? Buying in Orange County, CA « Yorba Linda, Placentia, Brea, Fullerton, Orange, and Anaheim Hills Real Estate Update Aaron Zapata (714) 904-7877

    […] All property taxes in California are paid in advance twice a year.  They are due every December and April.  The pre-paid amount will be determined based on the current tax bill and when you close.  For example, if the annual property tax on a property is $4,800 ($2,400 every 6 months) and you close escrow in December, you will have to pay $2,400.  For a more detailed explanation of Pre-paid property taxes please see this article: http://aaronzapatablog.com/2010/01/05/understanding-pre-paid-property-taxes-when-purchasing-a-home/ […]


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