Dayton Area Home Buyers Are Often Very Confused about The Short Tax Proration! Who can blame them?

The husband and wife real estate team of Cyndi and Don Shurts have been explaining the “Short Tax” proration for years to their buyers and sellers in Montgomery County, OH, and surrounding counties. 

We start from the point of confusion – most everyone you meet is confused about the “Short Tax” proration.

Let’s see if we can clear up the confusion.

When we are talking about a tax proration, we are talking about property taxes charged by the county the house is located within.  Here are some basic things to know about property taxes to get us started:

1. Each county charges homeowners a tax on the assessed value of the property.

2. Some counties charge less in taxes than other counties.

3. When selecting a home to purchase there are other taxes to consider as well, like income taxes charged by the city, or school taxes just for example.  To help you understand local tax burdens on residents of various Dayton area communities click here.

4. Taxes are not billed until the taxed calendar year is over.  So in 2023, homeowners get a tax bill for the 2022 calendar year.  You might hear this referred to as paying taxes “in arrears.”  

5. So when you buy a house the current owner has not likely paid their property taxes for the current year and a portion of the last calendar year because they have not received a tax bill. (Most of us don’t pay a bill before a bill is created or received in the mail or online!)

6. When a buyer has a purchase contract to buy a home, the seller will give the buyer a “tax proration” based upon the most recently available or already paid tax bill from the previous calendar year.  This calculation of an estimated property tax bill is most often figured by the title company in preparation for the closing of the sale on the property.  Most often this pre-payment tax proration by a home seller is given to the new homeowner at closing in the form of a credit on the Closing Document (CD).

7. Property taxes are paid semi-annual.  A property tax bill is generally sent to a homeowner in January and June of each year (semi-annual) with the bill coming due generally in February and July.  Remember, those bills are covering the previous calendar year.   For example, the property tax bill received in January is for the previous January – June (first 6 months), and the bill that comes in June is for the previous July – December (the last half of the year or last 6 months of the year.)

8. Keep in mind that if a homeowner says they “paid their taxes this year” or that their property taxes are current.  What they mean is that they have paid the tax bills they have received this year.  It does not mean they have paid taxes for the current calendar year.

In most parts of the country, no one talks about the “short tax proration” or the “long tax proration” because there is only one option: The Tax Proration (which is what we call the “Long Tax Proration.”)

When a house is bought/sold with the “Long Tax" proration,” the seller is required to pay in advance of the transfer of ownership any property taxes that have been billed or have not yet been billed for the time period in which the seller has owned the property.  The title company will take those monies from the seller and will pay any unpaid taxes and/or give the buyer the monies as a credit against their down payment.  In this case, when the tax bill is delivered to the home (or your escrow account at your mortgage lender) the new owner/new owner's mortgage company (ie., escrow account) will pay that tax bill from the escrowed funds provided at closing by the previous owner.

Got that so far?  If so, good.  We’ll move on.  If not, read this blog from the top again before moving on to the short tax proration.

If this proration is confusing don’t be too hard on yourself.   We have found that many new real estate agents and even experienced Realtors in our area don’t truly understand the difference between the long and short tax prorations!  Their lack of understanding leaves buyer clients in the dark.  If you are selling a home, you should have a real estate professional that knows how to deal with the tax prorations as well.

So what is a “Short Tax” proration?

I think the simplest way to understand the “Short Tax” proration is this.  If you agree to the “Short Tax” proration you are agreeing to pay 6 months of property taxes for the current owner of the home.  That’s it clear and simple.  You will pay out of your pocket a tax bill when it comes due for a time period in which YOU didn’t own the home.

Why is there a short tax proration?

Montgomery County Ohio has the short tax proration as the preferred or traditional method of calculating the prorations.  Why?  No one is certain.  Most believe it is tied to the Dayton Flood of 1913 when the Great Miami River flooded the city - killing 360 people, displacing 65,000, and destroying over 20,000 homes and structures.  The tax break was given to residents to help them rebuild their lives and homes and to encourage personal contribution to the building of the levies and dams currently in place to protect the city from a recurrence.  

Whether this is the reason for the “Short Tax Proration” is not 100% certain; however, if truly the explanation, it is unknown why the “Short Tax Proration” continues today.  But it does. 

Why would I agree to a short tax proration?

Though there is no law requiring the “short tax" proration,  the method of calculating property taxes is customary and expected by most home sellers in Montgomery County.  Other considerations:

• When purchasing a home in Montgomery County make your offer with the tax proration in mind.  Figure it into your financial numbers prior to making the offer.

• During the last few years of the greatest sellers’ market in real estate recorded history, many home buyers made purchase offers on homes in surrounding counties offering the short tax proration as a way to make their offer more enticing to the home seller, especially when in a multiple offer situation that has been very common the last two years.

• Keep in mind, that offering the “Short Tax Proration” allows you to give more money to the seller in the purchase offer you make without those funds coming out of your pocket right away (ie, you will ultimately pay the property taxes when they come due, in a few months from closing possibly.

• Prior to the sellers' market we are currently in, many buyers asked the sellers to pay the buyers closing cost for them.  Oftentimes, in exchange for the sellers paying the buyers closing cost at the transfer of ownership, the buyers would agree to pay for 6 months of the sellers closing cost in exchange.

Bottom line about "Short Tax" proration

I can share with you the math behind the tax prorations and I can illustrate it for you using a calendar, but the bottom line is as a buyer willing to agree to the short tax proration, you are agreeing to pay 6 months of the seller's taxes (semi-annual property tax).

Some people initially think this "Short Tax" proration is unfair to the buyer.  We understand that initial reaction.  Keep in mind that like any other terms or conditions of a purchase agreement, tax prorations options are fully negotiable. 

This is why having a trusted, highly-rated, and experienced Dayton Ohio Realtor like Don or Cyndi Shurts of Keller Williams Advisors helping your buy or sell a home can save you the stress of finding out this kind of information after the contract has been executed and save you literally thousands of dollars! 

Don & Cyndi can be reached via the communication tools on this real estate website or by calling/texting 937-241-2124 or 937-604-5194.