When selling residential real estate, a significant closing expense is often the real estate tax prorations made at closing, in the form of a credit, which can dramatically decrease the amount of money a seller might receive at closing. Real estate tax prorations are one of the items that can be negotiated when a real estate contract is executed and/or during an attorney review period.
In Illinois real estate taxes are paid in arrears, the taxes you pay this year cover the property taxes incurred for the prior year; which is why sellers typically provide a credit to buyers for property taxes not yet due, or otherwise not paid.
Since the total tax amount to be credited is often not known at the time the property is transferred, many residential real estate contracts call for a proration based on the “the most recent ascertainable full year tax bill.” And, often times the taxes are prorated at 105% or 110% of the most recent ascertainable full year tax bill, which can protect a purchaser from anticipated property tax increases.
Sometimes lawyers will modify the language to use various taxing metrics to calculate the prorations, multiplying the prior year equalized assessed value (EAV) by the current year tax rate, if known, is one alternative.
Calculations for Tax Prorations when using “most recent ascertainable full year tax bill”
Prior Year Taxes to Prorate = (“Proration %” multiplied by “the most recent ascertainable full year tax bill”) less any taxes already paid in prior year (if any).
Current Year Tax to Prorate = (“Proration %” multiplied by “the most recent ascertainable full year tax bill”) x (day of year of closing/365(366 in leap years)).
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