Why Buyers Owe the Seller Property Taxes at Closing (Michigan)

Transcript

Lightly edited from the video for readability.

Hi. I'm Matt Demorest, owner of HomeSure Lending. And when you buy a house, sometimes you owe tax back to the seller, and we're going to explain why. So there are 2 ways property taxes are calculated. Different states do it different ways.

One is in advance and the other is in arrears. In states like Michigan, they're paid in advance, but states like Ohio and Illinois and Florida, they're paid in arrears. So paying in advance means the seller has already paid the tax bills for that upcoming year. In Michigan, we have 2 tax periods. We have July 1st, which is usually the city taxes or summer taxes.

We have December 1st, which is usually the county taxes, also called winter taxes. If you've watched our escrow account video at home sure lending dot com slash f a q, you know that we like to use pizza as an illustration for a couple reasons. 1, every time we do the illustration, we have to buy a pizza and eat it. So, obviously, that's a good reason. 2, pizzas have a certain number of slices and we like a 12 slice pizza because each slice represents 1 month of the year.

So we're going to start with the pizza that the owner of the house bought and that pizza is their July tax bill. So that pizza has 12 slices. But now you're buying this house in August, and they just ate a slice. There's only 11 left. The thing is they paid for that whole pizza, and you want to eat those 11 slices because you're living in the house now.

So you gotta pay them back. So those 11 slices of pizza, that's the rest of the tax bill that they've already paid for that you need to give them cash back for and that's why you owe them that summer tax. Now for the winter tax, they will have paid that last December. Right? And now it's August and it's 4 months till December.

Well, that means they've eaten 8 months or 8 slices of this new pizza and there's only 4 left. So you own less money back because you're getting less pizza, but you own those last 4 slices worth of cash. So that's why in states where you pay tax in advance, you owe money back to the seller because you're eating the pizza that they paid for. Paying taxes in advance or arrears, these are complicated. And it's our job at HomeSure Lending to make things simple.

We use the term simple mortgage guidance, and we promise to help you purchase with confidence and refinance with ease. And making these complex topics easy to understand is what we're here to do.