Continuing our quest to simplify some of the Mortgage World’s most difficult subjects, this week we are tackling the beast of Tax Prebates. While these are very helpful for those who require assistance to pay taxes, it throws in a whole different curveball when you are selling your house. If you are buying a home, you may be required to bring more money to the closing. Don’t let this catch you off guard! Let this thorough and painstakingly researched guide help you through it.
So, to start with, what is a Tax Prebate? If you reside in your primary residence, (in Vermont, naturally), and you meet certain income restrictions, you may be eligible for the Tax Prebate. If you are accepted, then your taxes for the next tax year from July to June will be reduced by the prebate amount. This has to be done before April 15th, when you file your taxes.
Now, when one decides to sell their house, things get a bit tricky. Here’s why:
The property taxes affected by the Prebate are not based on the property, they are based on the sellers income. When a house is sold, and the seller has a prebate, the new buyer steps into their shoes. This means they enjoy the lower tax for that year, until the following July.
Therefore, the buyers have to reimburse the sellers for the prorated amount of the state payment for the remainder of the year. This can be due at closing, or can be negotiated between both parties.
There is a catch, however: The taxes are due mid April, but the prebate doesn’t take affect until the beginning of July. What happens if the selling of the house happens in between these dates?
Not only will the current tax year have to be prorated, but the upcoming year will have to be prorated as well. Depending on your state and the taxes due, you may need to bring a fair amount of cash to the closing. But the good news is that your taxes will be lower. Think of it as paying up front, instead of monthly increments!
One thing to remember is that legally, both parties can agree to not do the reimbursement, and can instead negotiate something else. Make sure that you and the other party are on the same page, so that there are no nasty surprises.
We hope this provided some clarity. Definitely keep in touch with your mortgage specialist and attorneys so you aren’t smacked with a large closing cost. If you need any assistance or questions answered, give us a call at 802-863-2020! Our website is always open as well!
**Many thanks to our friends at Stark Law, PLLC for helping us with this weeks blog!