It would seem that property tax prorations would be very simple, just prorate to the day of closing. Turns out, it can be a lot more complicated than that!
The first issue is that property taxes are paid in arrears, after the year has passed. In other words, the amount of the current year’s taxes isn’t known until the following year, nor are they due and payable until then. Since the seller owned the property during part of the current year, the seller owes the buyer a prorated amount of the taxes for the time that has passed during the current year.
Since we don’t have an exact number to prorate taxes for the day of closing the transaction, we need to use an estimate of the taxes that will be due. The Colorado Real Estate Commission-approved contract has two options for creating an estimate for prorating taxes that the buyer and seller will agree upon. One is based on using the “prior calendar year taxes” and the other is based on “the most recent mill levy and assessment”. The difference between the two may be substantial, depending on how much an assessment or mill level changes. It is always a good idea to compute both methods before agreeing upon a proration method.
There is a time when choosing the method of proration becomes even more complicated. That is during odd-numbered years, like 2025. In Colorado, property is reassessed in odd years, which creates a new value or assessment. In those years, the new assessment is released during the year, but the new mill levy doesn’t get released until January 1 of the following year. If the box is checked to prorate based on the most recent mill levy and assessment, an inaccurate estimate may occur. In times of rapid appreciation, the estimate becomes too high, and in declining markets, it becomes too low. During those times, it is usually best to use last year’s taxes as a more accurate estimate of what taxes will be.
A new higher assessment could occur in an even year. That might be a case where a property was significantly improved, resulting in a substantial change in value.
Although neither method of prorating taxes will produce a perfectly accurate estimate of the taxes for the current year, the buyer and seller usually will agree that it is a final settlement at closing. That way, you don’t have to go searching for someone to get reimbursed, long after the transaction has closed.
Senior tax prorations
The State of Colorado allows for seniors who have owned and occupied their home for 10 years and are over the age of 65 to get a discount on their property taxes. The discount is based on the formula: 50% of the first $200,000 in actual property value is exempt from property taxation. For the closing, taxes are prorated on the lower “Senior” amount, and the buyer gets the benefit of the lower tax rate until the end of the year that was prorated. At the end of that year, taxes would resume at the non-discounted amount.
New construction and tax prorations
Brand new construction creates some confusion for tax prorations, too. When you close on a newly constructed home, the tax proration is based on a land-only assessment and the current mill levy. That’s because the assessor hasn’t yet come to assess the improvement. In the closing statement, you will see an estimate of taxes that is very low and quite attractive. But don’t worry, the assessor is going to figure out you have a house on the property. If your lender is escrowing for property taxes, the lender will likely realize that the amount is low and base your monthly escrow payment on a more realistic estimate of what the taxes will eventually be.
If you need any help understanding the tax proration, your Realtor®, Title Company, or the county’s Assessor’s Office would be happy to help.
Duane graduated with a business degree and a major in real estate from the University of Colorado in 1978. He has been a Realtor® in Boulder since that time. He joined RE/MAX of Boulder in 1982 and has facilitated over 3,000 transactions over his career. Duane has been awarded Realtor® Emeritus by the National Association of REALTORS and the Circle of Legends by RE/MAX LLC. Duane is also the author of two books, REALTOR for Life and The Velocity of Wealth. You can reach out to Duane at DuaneDuggan@boulderco.com
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