How to Compute Real Estate Tax Proration Illinois & Tax Credits in Cook County Illinois
If you are a young attorney just starting out or just someone interested in the obscure world of tax prorations, this article is for you. Tax Prorations are essentially receiving credit for unpaid property taxes either now or later after tax bills come out.
History: In the Great Depression of the 1930’s; the State of Illinois granted a one year property tax holiday. This set all tax collections back one year.
Example: Your Tax Bill for the First Half of 2010 (January 1, 2010 to June 30, 2010) is $2000. The tax bill is dated March 15, 2011 and due by June 30, 2011. Since the bill is provided nearly a year after when the tax was incurred, the taxpayer has no idea what his tax bill will be when the tax is actually being incurred….He can only estimate based upon his prior tax bills.
Application: When you purchase a piece of residential real estate in Cook County, clear title is provided and all of the taxes that can be paid are paid up on the day of closing. However, because tax bills come out one year after they are due, there is often an entire year of property tax liability that is unpaid and the actual bill is unknown..
Example: Buyer of Real Estate makes offer to purchase a home in Chicago. The offer is accepted June 1, 2011. The closing is to be September 30, 2011. Full Year Tax Bill for 2009 is $4000.
First: Calculate the estimated tax liability up to the date of closing:
First Half of 2010 Tax Bill $2200 (must be 55% of the full bill from the prior year)
Second Half of 2010 Tax Bill (unknown)
First Half of 2011 Tax Bill (unknown)
Partial Second Half of 2011 Tax Bill (unknown)
The contract should call for a proration premium which is typically 105% or more. In this contract, the amount is 105%.
To figure out estimate full year 2010 bill, simply take the 2009 bill times 105%.
$4000 X 1.05 = $4200.
To figure out Second Half of 2010:
Take $4200 (total estimated 2010 bill) less the $2200 already paid for a credit of $2000 to be given at closing for this half.
To figure out estimated full year 2011 bill, simply take the 2009 bill times 105%
$4000 X 1.05 = $4200.
For 2011 you will be paying 1/2 of the $4200 for the period 1/1/2011 to 6/30/2011 or $2100
For the period or 7/1/2011 to 9/30/2011 you would pay the fraction of ((31+31+30)/365) x $4200
So our closing statement will show the following credits:
2010 Taxes 1st Paid
2010 Second Half Credit $2000.00
2011 First Half Credit: $2100.00
2011 Second Half Credit to 9/30/2011: $1058.64.
SO WHAT DO YOU DO WHEN YOU DON’T HAVE A FULL YEAR TAX BILL AVAILABLE AND MUST CREATE A BASE TAX AMOUNT FROM SCRATCH?
Answer: Take 2% of the purchase price. This is an approximate annual maximum tax rate for homes in Cook County and specifically applicable to the City of Chicago. This is used often with new homes that do not have any tax record yet.
For more information about tax prorations or to hire David Nelson as your real estate attorney, please call 877-464-6656 (877-GO-GO-NLO) or email David at firstname.lastname@example.org