As a homeowner, particularly a first-time homeowner or buyer, property taxes can seem confusing. Why do you need to pay hundreds of dollars at closing time for property taxes when you haven’t lived there all year? Understand how they work and your responsibility as a seller or buyer can bring a lot of clarification to the process!
What are Property Taxes?
Property taxes are essentially a local or municipal tax that homeowners pay to help fund municipalities. They are used for various things within your local municipality, including upkeep of public buildings, sanitation systems, police services, and more.
How are they calculated?
Property taxes are based on both the market value of your property, current tax rates, and to some extent, the budgetary needs of the municipality. Several factors can affect your property tax amount, including the use of your property (residential, agricultural, commercial, etc.) and the condition of your property.
Your property tax amount is calculated as a percentage of your assessed property value. In Lambton County, there are two organizations that calculate and influence property taxation: the Province of Ontario (calculates the education portion of the tax and is used to fund schools) and the Municipal Property Assessment Corporation (independent third party to determine the value for tax purposes of all properties in Ontario). You can find out more about Lambton County’s property taxation here.
How do property taxes affect me as a home buyer? As the seller?
Property taxes are part of the closing costs. Because property taxes are calculated on a yearly basis and become effective January 1st and need to be paid by June 30th, when you move into a new home before the year’s property tax was paid, it will seem you’re responsible to foot the whole year’s bill.
To avoid paying the property’s tax before you even owned it, you will receive a Property Tax Adjustment. Essentially, it divides the year’s entire property tax costs between the buyer and the seller according to the number of days each owns the property in that year. If you buy a home before June 30th, you will have to pay for the full year’s property tax if it has not been paid yet by the seller. Afterwards, you will be credited with the amount you paid for the days you did not yet own the property. So, if the closing date is March 1, you will receive a credit of the amount you paid for January 1st-February 28th.
If you are buying a home after June 30th, the property tax for the year will have already been paid by the seller. However, you are responsible for the tax amount calculated from the closing date to the end of that year (to reimburse the seller for the days they will no longer own the property). Therefore, as part of the closing cost, it will require you to pay more upfront since you will have to pay the year’s portion of property tax to the seller as part of the closing cost. However, you will not receive another property tax bill until the following year.
How much do I need to plan to pay?
If you are a first-time home owner in particular, property taxes can come as a bit of a shock. Sometimes they can cost hundreds to thousands of dollars, and if you’re looking to buy a home, it is a good idea to save for this cost ahead of time, and ensure it is part of your home buying budget.
Your local realtor is here to help! They will help you navigate your way through property taxes and how they affect your closing costs, helping you understand your local municipality’s individual property tax rates, calculations, and deadlines.