The Senior Exemption Tax Proration Nightmare...And Solution!

Buying a house from a Senior?  Has your real estate attorney checked in attorney review to find out of the senior had a senior exemption and/or senior freeze on their Cook County Taxes.  Well guess what?  No many people do check.   They assume the Senior Exemption and Freeze is great and keeps there taxes low for years  Well - get ready for a surprise.  Turns out the Senior needs to actually own the house to keep the exemption and the freeze.  This means that after the previous year tax billing ends, next years billing can be 2 to 10 times higher.  Sometimes taxes go up thousands of dollars.

Now this isn't a big problem in terms of taxes being current with what most people pay in a neighborhood.  The problem comes in that you are given a credit at closing for THIS YEAR's taxes that haven't been billed yet.  Since the senior isn't living in the home for the entire year and won't be living in the house on January 1st of the next year when the exemption is filed, you will end of paying the Senior Seller's taxes at an average of five times the amount you were given as a credit at closing.

Here's an example:

Senior Bob has been a senior since 1986.  He purchased his home on the north side of Chicago in 1965.  In 1986, his yearly taxes were $1200 per year.  Senior Bob Currently has a total income of $50,000.  Because Senior Bob's income is below $55,000 he continues to qualify for the Senior Tax Free.  He also qualifies for the Senior Tax Exemption. 

Senior Bob's taxes have not increased since 1986.  They are still billed at $1200 just as in 1986.  Senior Bob's Senior Exemption is particularly strong because he make less than $55,000.  Senior Bob's tax bill is $600.00.

Senior Bob's neighbor known as Neighbor Ned has a home exactly the same as Senior Bob.  Ned is not a Senior.  Ned's taxes are $10,000 per year.

Betsy Buyer has entered into a contract to purchase Senior Bob's Home for $500,000.  The closing is scheduled for August 31, 2011.  Betsy Buyer and Senior Bob entered into a contract on June 1, 2011 and attorney review expires on June 8, 2011.  Attorney Andy reviews the real estate contract and see's that tax prorations are at 105% of the last full year tax bill.  Attorney Andy has only handled two closings before and does not know much about senior exemptions and freezes.  He does not object to the tax prorations.

At closing, a credit is given to Betsy Buyer for the days from January 1, 2011 to August 31, 2011 at 105% of the last full year tax bill.

2010 Tax Bill:  $600
1.05 x $600 = $630
240 days from January 1, 2011 to August 31, 2011
240/360 X 630 = $420 credit at closing.

On March 31, 2012 Betsy Buyer receives her new tax bill and learns she has been reassessed without the senior tax free and does not qualify for the senior exemption.  Her tax bill is $10,000 with 55% of this payable in the first installment on March 31, 2011.  Problem - Betsy received $420 towards a $10,000 tax bill.

HERE is the solution:

Instead of using the last full year tax bill as a guide to future tax bills.  Use 2% of the purchase price as an approximate one year tax bill.  The prorate the 2% amount by 240 days.

Here is the formula:

Purchase Price ($500,000) X  0.02 X 240/360 = $6666.67 credit at closing.

Why the 2% figure.  This is an old estimate that works well with many types of "unknown" taxable properties such as new construction on vacant land, senior exemption/senior freeze property, or other types of properties in super highly volatile pricing areas.

As an attorney, you will find that some sellers will be resistant to this type of tax proration, but if a discussion is had about how this is calculated usually all parties will be in agreement when they realize this isn't a hidden price reduction.

To Hire NLO Nelson Law Office as your real estate attorneys, CLICK HERE TO CALL OR EMAIL

Transfer Tax Real Estate Summary In Illinois

In Illinois Municipalities can levy a transfer tax on a buyer and/or a seller.  A transfer occurs when a piece of real estate is sold and/or transferred.  Don't be mislead, a transfer tax is in its very essence a sales tax on the purchase of real estate.

In Chicago, the transfer tax is 0.75% of the purchase price for the buyer.   That means that the buyer pays a 0.75% sales tax when they buy a home in Chicago.  For example, if a buyer purchases a new home for $100,000, his or her closing costs will include a $750 sales tax.  Be advised that the seller will also pay a transfer tax as well.

Every, City, Town, Village or other municipality has a transfer tax, to determine when your transfer tax will be, please visit the Transfer Tax Summary.  This is a PDF document that is a great resource for realtors, buyers, sellers and anyone interested in the local transfer tax.  Please Click Here

If you are considering the sale of your home and need an attorney, please email my office for a free quote on legal services (include name, telephone, email and any other pertinent information):  Click Here

If you are a buyer and want to know how much you may have to pay in sales tax to purchase a home, email your purchase information (address and purchase price):  Click Here