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Wednesday, August 16, 2006

Demystifying Tax Proration: Cook County

In order to fully benefit from this article, please read our previous article, “Demystifying Tax Proration,” which was published on our blog last week.

The purpose of this article is to build on the information previously provided to point out how Cook County real estate taxes are different from surrounding counties, and how that affects the tax proration for real estate closings on Cook County properties.

Cook County taxes are prorated just the same as they are for any other county. The difference is that Cook County uses an alternative method of determining the amount and timing of real estate tax bills. Whereas other counties issue only one tax bill per year, payable in two equal installments, Cook County issues two tax bills per year, a “first-installment” bill and a “second-installment” bill. Furthermore, the second-installment bill is almost certain to be larger than the first (although theoretically it can actually be less).

Therefore, to understand how to properly prorate real estate taxes for Cook County, the only additional knowledge you need is how to ascertain the status of the tax liability. Here’s how it works.

Like all counties in Illinois, Cook County bills for taxes in “arrears,” i.e. 2005 taxes are billed and payable in 2006. However, the “first-installment” tax bill for Cook County is issued in mid to late January, is always due the first business day in March, and is always (with few exceptions) equal to one half of the previous year’s tax obligation. For example, if the total tax liability for a particular parcel was $8,000 for 2004, the first-installment tax bill for 2005 would have been $4,000. That first-installment bill would have been mailed out in late January, 2006 and would have been due March 1, 2006.

The date and due date of Cook County’s second-installment bill varies because the second-installment bill reflects any and all changes in assessed value, changes in tax rates applied by Cook County and other taxing authorities, tax appeals, exemptions, or whatever else might affect the amount of the bill. The information needed to determine the amount of the second-installment bill therefore comes from a variety of sources and Cook County does not issue its second bill until it has the information needed to issue a correct bill. When the process nears completion, the Cook County Treasurer’s Office publicizes the date it expects to issue the second-installment bill.

Generally, the Cook County second-installment bill might be issued as early as July or as late as October, but they usually come out in August. Once issued, the second-installment bill will be due just over 30 days after it is issued. For example, the second-installment bill for 2005 taxes was issued at the end of July, 2006 and is due September 1, 2006.

For purposes of closing a real estate transaction, just as with any other county, to determine the status of an issued tax bill we simply look at the title commitment to see whether it is paid or unpaid. For example, assume we had a closing on property located in Cook County on July 1, 2006, and the total real estate tax liability for 2004 was $8,000. There would have been a first-installment bill for Cook County real estate taxes issued at the end of January, 2006. The bill would have been for $4,000 and it would have been due March 1, 2006. To check on this, we would have looked at the title commitment to see if it showed the first-installment bill paid. If paid, those taxes would not have been an issue in the closing. If unpaid, the tax, and any penalty due, would have been shown on the HUD-1 as a credit to buyer and as a liability against seller’s proceeds. In the alternative, if the title company was paying the tax out of the proceeds of the closing, the tax would have shown on the HUD-1 as a liability against the seller’s proceeds with no credit to the buyer.

What about the as-yet-unissued second-installment bill for 2005 taxes? Continuing with the above example, as of our July 1, 2006 closing, the amount of this bill would have been unknown. Therefore, we would have turned to the real estate purchase contract for guidance. As we discussed in our previous article, the real estate purchase contract would have stated a factor by which the last-available full year’s tax obligation would be multiplied to reach a fair guess as to the amount of the unknown bill. For our July 1, 2006 closing, the last full year’s tax obligation would have been 2004, and we said that was $8,000. Let’s further assume our agreed upon factor was 110%. We would have multiply $8,000 by 1.10 and find that our fair guess was that the full year’s bill for 2005 taxes would total $8,800, regardless of the amount of the first-installment bill. We have already dealt with the first-installment bill for 2005, and it was $4,000. Therefore, the difference between the first-installment bill and the estimated full year’s tax liability would have appeared on the HUD-1 as a credit to buyer and as a liability against seller’s proceeds in the amount of $4800.

This leaves one further question. What about taxes from January 1, 2006 to July 1, 2006? We would have handled this issue slightly differently than the second-installment bill for 2005 because instead of figuring the likely amount of the second-installment bill, we would have had to prorate over a number of days. Again, the real estate purchase contract would have been our guide. Our last-known full year tax obligation would have been 2004 at $8,000; multiplied by 1.10, that is, again, $8,800. We would have divided 8,800 by 365 to find that the estimated amount of tax accruing per day during 2006 was $24.11. We would have then simply counted the number of days from January 1, 2006 up to and including July 1, 2006, which is 182 days. We would have multiplied the tax per day by the number of days ($24.11 x 182) to find that the seller’s estimated liability for Cook County real estate taxes from January 1, 2006 to July 1, 2006 was $4,388.02. This amount would have appeared as a credit to the buyer on the HUD-1 and as a liability against seller’s proceeds.

The appropriate factor for prorating Cook County real estate taxes can be a tricky issue. Cook County reassesses one third of all real property within its boundaries every year, so that all real property is reassessed every three years. In addition, Cook County tax rates tend to go up more quickly than in surrounding counties. If a transaction is closed in a year when the property in question is to be reassessed, the reassessment coupled with rising tax rates can result in a dramatic increase in real estate taxes over previous years.

Prepared by: Douglas Oliver © 2006. Staff Attorney
Freedman, Anselmo, Lindberg & Rappe, LLC.
Thomas Anselmo, Real Estate Practice Partner


At 7:51 AM, Anonymous Anonymous said...

I have seen some titles for Cook County which state that the tax amounts could not be determined due to some issue with the County. Can you explain why this was happening and when the amounts will be available?


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