Understanding Property Taxes

Understanding Property Taxes

Property tax revenue supports public schools, county governments, special districts, municipal governments and junior colleges. All of the revenue generated by property taxes stays within the same county. 

The property tax bill is based on the assessed value of the property, not the market value. The county assessor is responsible for discovering, listing, classifying and valuing all property in the county, in accordance with state laws. The assessor multiplies the home’s market value by a percentage called the assessment rate to arrive at the number on which taxes will be based. Colorado counties reassess property values every two years.

Property taxes are an expense owners will continue to pay every year for as long as the home is owned, even after the mortgage is paid off. When it comes time to sell, many buyers will look at the tax bill as a key consideration when deciding whether to purchase the property.

There are two reasons why Land Title addresses property taxes.

For one, in Colorado, unpaid property taxes have priority over all other liens, including deeds of trust. The Mortgagee’s Title Policy we commit to issue insures the lender that they have a first position (in the case of a traditional purchase with a loan) lien on the property. This means we must pay all outstanding property taxes at closing.

Second, it is in the Contract to Buy and Sell and, as a title agency, we are beholden to the contract. Paragraph 14 addresses the Payment of Liens and Encumbrances. It states “Unless agreed to by Buyer in writing, any amounts owed on any liens or encumbrances securing a monetary sum against the Property or Inclusions, including any governmental liens for special improvements installed as of the date of Buyer’s signature hereon, whether assessed or not, and previous years/ taxes, will be paid at or before Closing by Seller from the proceeds of this transaction or from any other source.”

Contractual Specifics

Property taxes are addressed in the Contract to Buy and Sell in four places.

  • 8.4 – Special Taxing Districts
  • 8.5 – Tax Certificate
  • 14 – Payment of Liens and Encumbrances
  • 16.1.1 – Tax Prorations

In paragraph 8.5 of the Contract to Buy and Sell, it states that a Tax Certificate for the Property listing any special taxing districts that affect the Property must be delivered to the Buyer on or before Record Title Deadline. Tax Certificates are broken into 7 sections. 

The Tax Certificate will outline the following:

  • Certified through date
  • Property information – legal description and address
  • Owners name and assessed value
  • Tax status and balance due
  • Tax levy aka mill levy
  • Standard statement regarding special taxing districts
  • Certified exception conditions (this is the section that informs us if there are additional liens, delinquent taxes, exemptions, etc.)

How are property taxes collected?

There are two critical elements to know regarding how property taxes are collected.

  • For one, property taxes are paid in arrears.
  • Property Taxes are due and payable on January 1. Property taxes can be paid either as a lump-sum amount or in two installments.
    • If paid as a lump-sum, payment in full is due on April 30.
    • If paid in installments, the first half is due by the last day in February and the second half is due June 15.

Since property taxes are paid in arrears, Land Title must collect any outstanding taxes from the prior year and prorate the current year taxes as outlined in paragraph 16.1.1 of the contract.

In order to pay outstanding taxes, we check two sources. The first includes online county records to verify the amount due. The second includes looking at the Tax Certificate issued by the county in which the real property is located.

Using the example above, the 2015 taxes were $3,084.46 and they were paid in two installments. There are no prior year taxes to be collected.

With regard to the proration of taxes, Land Title will refer to paragraph 16.1.1 of the contract.

The proration calculation can be based on two options: 1) Taxes for the Calendar Year Immediately Preceding Closing and 2) Most Recent Mill Levy and Most Recent Assessed Value.

If the first option is marked on the contract, the amount on the tax certificate is used for the proration of taxes. For example, one would divide $3,048.46 by the number of days in the year and multiply that by the number of days the seller owned the property. This proration is a debit / credit on the settlement statement.

If the second option is marked on the contract, amounts can be found on the county website.  Once the current assessment and mill levy is determined, the calculation is as follows: the current assessed value is multiplied by the current mill levy and then divided by the number of days of the year. This amount is then multiplied by the number of days the seller owned the property. This proration is a debit / credit on the settlement statement.

Year End Closings regarding Taxes

In December, county treasurers offices will close down. This means they stop issuing tax certificates and start working on taxes for the next calendar year. Given that the new mill levy and assessed value is not certified, the exact tax amount is unavailable until certification is complete, which is typically mid-January. With taxes due as of January 1, Land Title will escrow from the seller 125% of the most recent mill levy and assessed value until the actual tax figure is available. Once the tax amount is available, Land Title will pay the outstanding taxes and refund the difference to the seller.

New Build Taxes

New build taxes are a bit more complex. Since it is a new home, there will not be an assessed value for the property yet. Therefore, the taxes are based on vacant or partially improved land only. Land Title still handle taxes the same – by paying outstanding prior year taxes and prorating the current year.  

For the proration, we follow the instructions outlined in the purchase contract, which is typically a non-standard builder contract. If the lender asks what we suggest basing the tax escrow upon, the typical answer is 1% of the purchase price.

Disclaimer: This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal or accounting advice or other expert assistance is required, the services of a competent professional should be sought. © Copyright, 2023, by Land Title Guarantee Company.