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Most Common Tax Certificate Mistakes and How to Avoid Them
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Most Common Tax Certificate Mistakes and How to Avoid Them

Mariah McQueen

A homeowner’s liabilities can be taxing to think about and property taxes are no different. The federal government doesn’t have a uniform process for how municipalities should standardize property taxes which leaves room for deviations from one municipality to the next. For this reason, is why Tax Certificates are recommended to clear up any confusion.

 

"Tax complexity itself is a kind of tax." - Max Baucus, U.S. Ambassador

 

As a quick refresher, a Tax Certificate should not be confused with a Tax Deed Certificate. The Tax Certificate discussed in this blog refers to a comprehensive report that helps homeowners answer the following questions:

  • What taxes do I need to pay?
  • What taxing districts does my property reside in?
  • Do utility providers collect for my property?
  • Do I owe any unrecorded debt?
  • Are there any active lien liabilities?

 

Many pitfalls can be experienced if a title agent is not proficient in local taxation requirements and in today’s world of labor challenges, is not uncommon due to the need for hiring and training new staff. Obstacles include third-party access to all relevant tax information, lack of uniformity, and even public record errors. Any of these mentioned issues can cause issues such as an escrow shortage or missed delinquencies and liens.

Luckily, it’s easier to avoid these roadblocks if you know they’re coming. Below, we have included some common mistakes to look out for on Tax Certificates.

 

Mistake #1: Missed Authority

One of the main purposes of a Tax Certificate is to compile a report of the individual taxing authorities for a property, so it may come as a surprise that missing a tax authority is common. If you live in a state like Florida that consolidates all authorities to one bill, you’re in luck! But not all states are as fortunate. 

If a tax team isn’t proficient in the subject property’s state, authorities may commonly be missed including:

  • City tax
  • School tax
  • Fire Tax
  • Utility tax

 

City Tax

If there is no itemized city tax found on a tax bill, it’s often presumed to be within unincorporated boundaries – an area that is not governed by a local municipal corporation. In this case, the assumption that the county collects for all can be costly and the homeowner ends up missing a city bill entirely. City and town boundaries can be a bit confusing. It’s important to get a good idea of where exactly the property is located in relation to the nearest town’s tax district boundaries to avoid a missed tax bill.

Common states that can collect city tax separately:

  • Colorado
  • Delaware
  • Georgia
  • Kentucky
  • Louisiana
  • North Carolina
  • South Carolina
  • Tennessee
  • Texas

 

School Tax

School tax is a commonly missed authority in the state of Texas as it’s often collected on a bill separate from the county. Because the state has so many school districts (1,029 within 254 counties, to be exact), it’s common for some school taxes to be collected by counties that the property doesn’t even reside in. For example, Collin county may collect the city and school tax for a property located in Denton county. This is the case for Frisco Independent School District.

School taxes are not cheap. The median school district tax rate has been around $1.04 per $100 of property value since 2006 according to the Texas Tribune. That means the average tax bill for a house with a taxable value of $300,000 would be around $3,120. Now that property values have skyrocketed, the burden of a missed school tax would cause even more financial distress. 

 

Fire Tax

Rather than appearing as a special assessment on a regular tax bill, fire departments may send out their own bills to fund their expenses. This is not very common which is why it is often a missed separate authority when it applies. Fire tax liabilities are normally distributed between several districts within a municipality so it’s important to locate the correct one the property falls within.

States that can have separate fire district tax:

  • Alabama (Jefferson County)
  • Connecticut
  • Rhode Island

 

Utility Tax

Utility tax provides an alternate way to finance infrastructures, such as water, sewer, and drainage. Certain districts dictate that all property owners within boundaries must pay their fair share of contributions regardless of their tax status and exemptions. Some states collect separate taxes that aren’t included on the county tax bill and often are forgotten or unaware of.

Oftentimes, billing dates may differ from the standard property taxes. In the state of Connecticut, town taxes are billed in July while utility tax is billed in October.

 

States that can collect separate utility tax bills include:

  • Connecticut
  • Delaware
  • Idaho (Irrigation)
  • Rhode Island
  • Texas 
  • Virginia (Stormwater)

 

If any authority were to be missed, the correct amount of funds would not be collected at closing and would cause a shortage in the escrow. 

 

What is an escrow shortage? 

Most lenders require homebuyers to open an escrow account when signing a contract. Lenders use an escrow account to pay property taxes on a homeowner’s behalf. A shortage happens when the balance falls short of the minimum required balance. This would most likely cause the client’s payment to go up, causing financial hardship.

 

Mistake #2: Incorrect Estimation

Estimates are often needed to determine the amount of taxes homeowners will be responsible for in the future and if enough funds are collected to meet escrow payments. 

This is common for properties that:

  • Are newly built
  • Recently sold and the prior homeowner had owner specific exemptions
  • Are not fully assessed

 

Incorrect estimations many times cause an escrow shortage because the taxes used were estimated and typically are underestimated. Causes for a miscalculated estimation include:

  • The Assessment Ratio was not considered in the calculation 
  • An outdated or unofficial tax rate was used rather than a new voted-upon tax rate.
  • The purchase price was used instead of the fair market value and vice versa

 

Mistake #3: Missed Adjacent Parcel

Some homeowners choose to split their parcels into various lots or purchase the lot next door to expand their profits when selling. Splitting parcels can bring greater value for your property than selling the entire parcel as a whole. If the newly split or acquired parcel shares at least one (1) common boundary with the other, this is considered an adjacent parcel (or contiguous parcel). Owners are responsible for paying the property taxes separately but the second parcel is often missed in a tax search.

Hypothetically, if a property is on the outer boundaries of a county, it’s possible that the county or town lines can separate two parcels into completely different tax districts. The county Geographical Information System (GIS), if available, can help identify the property’s registered location to determine if further property research is required. In general, adjacent properties complicate both the property tax bill payment process for homeowners and the research process for title agents by making the parcels easy to miss.

 

Mistake #4: Missed Delinquency

According to the National Tax Lien Association, $14 billion in property taxes go unpaid each year. To put that in perspective, you can hand all 330 million people in the United States $40 with that kind of cash.

 

“Philosophy teaches a man that he can't take it with him; taxes teach him he can't leave it behind either” - Mignon McLaughlin, American Journalist

 

Typically what happens when a delinquent amount is missed is:

  1. The researcher looked into the most recent tax bill but not prior years
  2. The first installment has been paid and is assumed to be the full amount
  3. The installments are assumed to be equal. While this is the case for most municipalities, there are sometimes additional fees that are only added to one of the installments

 

This may be one of the most significant mistakes a researcher can make. After a predetermined amount of time, the property will then go into a tax sale which can halt the transfer of title process fully and put the property at risk of foreclosure.

 

Mistake #5: Incorrect Dates

Fixed vs. Flexible Dates

In some states, like Florida, which has a fixed deadline of March 31st, it’s easier to keep up because dates aren’t expected to change yearly like in some other states. The greater the variation among those dates, the harder it is to keep up. Sometimes it’s the third Monday of a month or based on when tax bills are released and homeowners don’t know until they see the printed bill. 

Flexible states include:

  • Georgia
  • Maine
  • Vermont
  • Virginia

 

Delayed Tax Bills

Phone reminders and circled calendars may prove to be useless in certain circumstances.

Just because a state typically abides by a fixed deadline doesn’t mean it’s completely set in stone. Collectors may need to delay bills due to unforeseen circumstances and may extend the due date accordingly. 

This may sound like a procrastinator’s dream but this can lead to the prior year’s tax information being reported instead and delay the most up-to-date tax information. This was common in 2020 when COVID-19 delays impacted tax collection offices and many had to extend deadlines to keep up.

 

Payable vs. Tax Year

The payable year is not always what the municipality considers to be the tax year. This can cause due dates to be reported a year off from what is correct. For example, several states like Indiana pay in arrears, meaning that the 2020 tax year bills aren’t payable until 2021. 

On the contrary, some states bill in advance. For example, Clark County, Nevada sent their 2022 Tax Year bill in July of 2021 with the first installment due on August 16th. If the Tax Certificate were to reflect the due date as August 16, 2022, rather than August 16, 2021, the homeowner could miss the due date.

 

Discount Dates

Homeowners could end up overpaying if the discount is not considered in the Tax Certificate. For example, the state of Oregon offers a three percent discount if taxes billed on November 1st, are paid by November 15th. If the discount is not considered, the homeowner may end up paying the full levied amount on the tax bill rather than taking advantage of the discount.

 Other states that have discounts include:

  • Florida
  • Kentucky
  • Maryland
  • North Dakota
  • West Virginia

 

Mistake #6: Missed Special Assessments

Commonly referred to as “Non-Ad Valorem”, this type of tax is used to fund a local project that isn’t sufficiently funded by the regular property taxes. This type of tax is portioned among homeowners to cover the full cost of a project and may not appear right away on a new homeowner’s first tax bill. This could include street lights, sidewalk paving, and sewer lines that are needed. 

​​Typically what happens before placing special assessments, a resolution of intent is created and a public hearing is held. Taxpayers will vote and have the option to dispute the tax. While efforts are made to inform homeowners, someone who isn’t regularly keeping up with local tax changes may not become aware. 

Counties and towns often include this on the tax bill but that’s not always the case. There are cases where a separate entity collects for this due to a different due date.

Additionally, some properties that are classified as “fully exempt” properties may still be held liable for special assessments. For example, a veteran living in Palm Beach County, FL with a service-connected disability is exempt from ad valorem taxes but is still responsible for any additional non-ad valorem assessments.

 

Did you know? Some Arkansas counties levy what is called “voluntary taxes” – an extra line on the annual bill for voluntary property taxes to help pay for specific services like animal shelters, EMT services, and county jails.

 

How can these mistakes be avoided?

Below are some tips to avoid Tax Certificate Mistakes:

  1. Research trends for local and state property taxes. 
  2. Be mindful of state-specific terminology on tax documents. 
  3. Seek out counsel from a real estate lawyer in your area to be sure that all necessary property tax requirements are checked off 
  4. Stay organized and follow up often for documents from states that don’t have online databases

 

Lastly, a tax certificate may be required in the closing contract and the title commitment but is recommended regardless of requirements so homeowners can be aware of their tax liabilities and debt.

Outsourcing tasks such as tax certificates can take the liability of these mistakes off your plate by allowing experts to perform these reports. PropLogix offers services such as Tax Certificates to simplify the process for you and we offer updates through the entire process. Don’t let simple tasks like these hold you back from meeting the needs of your clients and protecting your reputation fully.

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Mariah McQueen Supervisor - Tax Certificates

Mariah McQueen is a Supervisor for the Simple Tax Certificates department at PropLogix who enjoys using creative outlets to break down intricate concepts to easier to understand the material. She currently lives in Orlando and enjoys rollerblading, documenting her travels across the US, and playing the piano.