Who Pays Property Taxes When Buying with Owner Financing?

The question of who is responsible for paying property taxes when purchasing a property using owner financing is a common inquiry for both buyers and sellers. This article aims to provide a clear and comprehensive understanding of who typically bears the cost of these taxes in the context of owner financing.

The Basics of Owner Financing

Owner financing, also known as seller financing, is a form of property purchase agreement where the seller provides the financing instead of a traditional mortgage lender. This arrangement often involves a down payment, periodic mortgage payments, and an agreement on how the balance and taxes will be managed.

The Cost of Property Taxes in Owner Financing Arrangements

Property taxes are a vital responsibility that buyers need to understand when purchasing a property. While the rules can vary by jurisdiction, in most cases, it is the responsibility of the buyer to pay the associated property taxes, even when using owner financing.

Who Pays Property Taxes?

Traditionally, the property tax liability falls on the person who is the owner of the property at the time the taxes are due. In an owner financing arrangement, the buyer becomes the owner, even if the seller is still receiving monthly payments. Therefore, it is the buyer who must pay the property taxes.

Why the Buyer Pays Property Taxes

The buyer takes on the responsibility of paying property taxes because they are in possession of the property and the title to the property is transferred in their name. These taxes are based on the assessed value of the property, which is typically determined by the local government's tax assessment agency. Property taxes are a significant ongoing cost of owning a property, similar to other ongoing expenses like insurance and maintenance.

Provisions and Agreements in Owner Financing

Both the buyer and the seller should agree on how property taxes will be managed. Common provisions include:

Escrow Account: The seller may insist on a dedicated escrow account where a portion of the monthly payments goes towards property taxes and insurance. This ensures that the property is well-maintained and that future tax bills can be paid. Additional Payments: The buyer might agree to make additional payments directly to the local tax collector to ensure that the taxes are always current. Monitoring and Verification: If the seller and buyer are not using an escrow account, it is important for the seller to verify that the taxes are being paid regularly. This can involve the seller obtaining proof of payment or being notified each year that the taxes have been submitted.

Dues Responsibility and Cost Distribution

While the buyer pays the taxes, there may be instances where the seller agrees to cover certain costs upfront or in a lump sum. For example, the seller might pay the initial property taxes as part of the closing process. However, the on-going responsibility for property taxes remains with the buyer.

Closing Costs and Tax Liabilities

When a property is sold through an owner financing agreement, closing costs (such as origination fees, administrative fees, and other transactional costs) are shared by both parties. The buyer's closing costs might be included in the financing amount, but they do not affect the property taxes. Property taxes are a separate and ongoing commitment that must be fulfilled by the buyer.

Importance of Clear Agreements

Both buyers and sellers should have a clear and detailed agreement regarding the payment of taxes and property management. This agreement should be legally binding and should be signed by both parties. It should include provisions for:

Who will pay the taxes How the taxes will be paid (through escrow, direct payment, or other methods) How to handle changes in tax assessments or rates What happens if the taxes are not paid on time

Conclusion

When buying a property using owner financing, it is the responsibility of the buyer to pay the property taxes. This is a crucial aspect of the financial agreement that both parties must understand and agree upon in advance. Clear and detailed agreements, including provisions for property taxes, can help ensure a smooth and equitable transaction process.

Frequently Asked Questions (FAQs)

Q: Can the seller be responsible for paying property taxes?
Ans: No, in most cases, it is the buyer who is responsible for paying property taxes. However, the seller may cover initial taxes or provide certain arrangements, but the ongoing responsibility remains with the buyer.

Q: What if the buyer defaults on property taxes?
Ans: Defaulting on property taxes can result in penalties, lien placements, and tax liens on the property. This can affect the seller's ability to receive future payments and may result in legal action.

Q: How can I ensure property taxes are paid on time?
Ans: Creating an escrow account or having detailed agreements for monthly payments is a good way to ensure timely payments. Additionally, maintaining good communication between the buyer and seller can help manage this responsibility more effectively.