I’m With Irwin and SCook85 - Posted by Ed Wachsman
Posted by Ed Wachsman on December 07, 1998 at 05:17:10:
The bottom line is that real estate taxes are not considered a cost of closing. They are dollars from a third party transaction that have to be dealt with and the best and most convenient time to deal with them happens to be at closing.
In various parts of the country, differing customs have evolved that distribute the payment of the various fees and charges related to the actual property transfer. What has been universal in my experience (transactions in OH, CT, IL, Maryland, NV, NJ, and some other states) is that the real estate taxes are dealt with not on an arbitrary agreement or custom that seems fair within the particular community but rather it is based on the premise that whoever owns the property at a particular point in time should be the person responsible to pay the tax. What complicates matters is that the laws vary. In some counties they are paid in advance, in others the are paid in arrears. The law requires and dictates when they be paid. In Ohio we pay taxes in arrears. In your state it sounds like they are paid in advance. In our state seller’s typically give a credit and pay the buyer money to pay the taxes that accrued on the seller’s “watch” since the bill will not come out until sometimes months after the closing. If I understand your post correctly, in your circumstance they have paid for taxes in advance for a period of time during which they will not be the owner of the property. The correct thing to do is to reimburse them as you will have the person buying from you reimburse you.
Think of the accounting that has to be done at closing to handle rents which are also not a closing cost. If you buy a property on the 15th of the month the seller gets to keep half the rent and credits you with half the rent. In the case of rents and real estate taxes you are adjusting third party financial matters on the ledger sheet for income and expenses that are received or paid for in advance and have to be reconciled for the period that you do not own the property.
At the risk of muddying the water, on occasion as an investor I will sometimes “eat” a tax credit due me (remember my county is the reverse of yours) as an inducement for the seller to take my offer. In your circumstance you could offer to “eat” a tax credit due you when you sell if you think that might be appealing to the buyer. In other words this can be used as another bargaining chip to use when appropriate.