Understanding Property Taxes
With homeownership comes… taxes!
Here are a few things to be aware of for homeowner taxes in Chicago & Chicagoland. This information is provided in collaboration with our trusted attorneys at Marneris Law, & is provided in good faith, but always consult a trusted tax professional for your specific situation.
- Property Taxes in Cook County
- Property Taxes in the Suburbs
- Paying Property Taxes
- Homeowner Exemption
- Tax Pre-Payment by Sellers
- Personal Taxes
- Closing Documentation
Property Taxes in Cook County
Property taxes in Cook County are billed in arrears, or one year behind. The 2019 bill is payable in 2020, the 2020 bill in 2021, and so on. The taxes are billed in two installments: the first installment is due in the beginning of March and the second installment is due in the beginning of August. The first installment is 55% of the prior year’s tax bill. The second installment is a little more complicated, as it is computed first by determining the full year’s tax bill by calculating as follows: new assessed valuation x equalization factor x local tax rate, less any applicable property tax exemptions. The first installment is then deducted from this total to obtain the final second installment amount.
Of the 3 variables used to determine the tax bill (i.e., assessed valuation, equalization factor and local tax rate), the most important to the property owner is the assessed valuation. Cook County operates on a triennial reassessment schedule, meaning that the Cook County assessor reevaluates properties’ assessed values every three years. The three-year cycle will vary from one Township to the next. The Township in which your property is located can be found on your tax bill. During a triennial reassessment year, it is common for property owners to file an appeal to keep their tax bills down. Your closing attorney likely has a good referral for a tax appeal attorney, who can help you through this process.
Property Taxes in the Suburbs
Here are links to learn more about property taxes in nearby counties:
Paying Property Taxes
Some lenders will pay your taxes for you out of an escrow account. In other scenarios, you will be responsible for paying the property taxes. These property tax bills are sent twice a year. Additional information on property taxes can be found here.
If you are living in the property, you will be entitled to receive a homeowner exemption, which considerably reduces your tax bill. You have to be living in the property as of the first of the tax year to qualify. Therefore, if you closed on your property in 2020, you would not be eligible until the 2021 taxes, payable in 2022. You can locate the exemption application on the Cook County Assessor’s website and submit it in the beginning of 2022, when the application process for 2021 opens. More information about this exemption and how to apply can be found here. This exemption will automatically renew each year so long as you occupy the property as your primary residence after initial approval.
Tax Pre-Payment by Sellers
As stated above, property taxes are billed in arrears in Cook County. Therefore, there may be a period of time during which the seller owned the property, but they are not able to pay the bill because it hasn’t been released yet. What will happen is that the seller will give you a credit at closing, so that when the bill is available in the future, after you have become the property owner, you already have the funds from the seller to make the payment. The seller has, in essence, prepaid their portion of the bill. The way the prepayment is determined is by taking a percentage of the most recent ascertainable full year tax bill and multiplying it by an inflated percentage to account for increases in the taxes from one year to the next. During non-reassessment years, it is common to see that percentage at 105%-110%. During a triennial reassessment year, the percentage will vary from one property to the next, depending on the change in assessed valuation. The percentage could be much higher than 105%-110%. This is something you will want to discuss further with your real estate team.
Another situation you may run into is if the seller improved the property, but the current assessed valuation does not account for those improvements. Similarly to the discussion above, the seller may need to provide you with a credit at closing that is based upon a percentage greater than the standard 105%-110%, and that is a better reflection of the current value of the property with the recent improvements. Sometimes, when the expected change in taxes is a considerable amount and/or is very difficult to ascertain, the parties will enter into what is known as a tax “reproration” agreement. This involves the parties revisiting the taxes the following year(s) when the applicable bills are available. The parties then make each other whole at that time.
If you financed your new home, you may be able to deduct mortgage interest to reduce your taxable income.
Be sure to keep all of your closing documentation somewhere easy to locate, in the event you need to reference it for tax purposes. We recommend keeping digital copies, especially of your HUD/settlement statement.
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