They say that only two things in life are certain, death and taxes. Here in Cook County, Illinois, the County Treasurer oversees the second-largest property tax collection and distribution system in the United States. According to the Treasurer’s Office, it collects more than $11 billion each year in taxes from owners of over 1.7 million parcels of property.
In Cook County property taxes are paid in two installments, due on March 1 and August 1 each year. They are paid in arrears. This means that taxes paid in 2013 are for government services that were provided in 2012 and so on. Further, because Cook County uses an accelerated system of billing taxpayers, the first installment of the year represents 55% of the prior year’s total tax.
However, because the first installment of taxes is assessed without actually calculating the tax rate to be applied, this installment is not used to calculate year-end tax obligation. Accordingly, the second bill will reflect any adjustments from reassessment, changes in the tax rate or deductions for exemptions.
Taxes & Real Estate
It is important for individuals involved in the sale of real estate to understand how the Cook County taxation system works. In a typical real estate transaction, the seller pays whatever real estate taxes accrued while he or she was the owner of the property. The buyer pays the taxes that will accrue after he or she takes title to the property. In order to facilitate this exchange, real estate taxes must be prorated to the date of the sale.
To prorate Cook County property taxes for the purposes of a real estate transaction, one must look at the last full tax year. For instance, if buyer purchased a home in March of 2012, then 2011 would be the last full tax year. Generally, real estate contracts will prorate taxes at higher than one hundred percent, often between 105% and 110%.
Here’s an example of how proration works in the real world. A house is purchased and the closing is scheduled for June 15, 2012, so the last full tax year is 2011. The tax paid on the property for 2011 was $15,000.00, and the real estate contract states that the tax is prorated at 105%. The first installment will be 55% of the last tax year, so that’s $8,250. The second prorated tax installment is then calculated by multiplying the 2011 tax amount by 105%, equaling $15,750, and subtracting the first installment amount to get $7,500.
To calculate the tax owed on the days prior to the closing date, divide $15,750, by 365 to get the amount of tax owed per day, $43.15, and multiply that by the number of days from January 1, 2012, to the date of closing, June 15, 2012, or 167 days. 167 multiplied by $43.15 equals $7,206.16. Accordingly, the total amount of tax would be the second installment amount of $7,500 plus the prorated amount for days leading up to closing of $7,206.16, for a total of $14,706.16.
$14,706.16 is the amount the seller would pay to the purchaser because, until the time of closing, the seller has been benefitting from government services as a result of the fact that the taxes in Cook County are assessed in arrears.
As the above example demonstrates, the Cook County tax provisions can be very complex and may play a significant role in the sale and purchase of real estate within the County. If you have questions regarding the how Cook County taxes are calculated with regard to real estate transactions, contact the experienced real estate attorneys at The Slater Firm, Ltd. today.