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
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:
- North Carolina
- South Carolina
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.
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)
- Rhode Island
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:
- Idaho (Irrigation)
- Rhode Island
- 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.