I have myself all sorts of confused right now... we have a purchase loan. I'm in IL where taxes are paid in arrears. So the neither installment of the 2016 taxes, payable in 2017, have been paid yet. We have them disclosed in Section F as payable by the borrower for the full amount plus penalties. Then on page 3 Section L & N, we have them listed under "Adjustments for Items Unpaid by Seller" so that it's actually the seller paying them since she owned the property during 2016.

Is that the correct way to handle this? It seems so confusing to not just list it as a seller paid expense in Section F and leave it off of the adjustments section.

they aren't being pro-rated, they are being paid in full if I'm understanding you correctly. If that's the case, just show them in F as seller paid.

Correct, they aren't being prorated. They're all being paid by the seller because she owned the property during the time frame that those cover.

There is a proration for the 2017 taxes payable in 2018, but that's a separate thing.

yep. That credit/debit will only show up under the pro-rated section of buyer and seller CD.

So follow up question - when would taxes go into Section F as buyer paid, since we're in a state that pays in arrears?

I'm not certain I'm following you, but let's just say the buyer agreed to pay the taxes now due, instead of the seller [think distressed sale], then they would show up in the buyer column. Other than that, about the only time I see it happen is on refinances where taxes are due and unpaid.

Yep, I think you followed me just fine. I think I may be confusing the LE and CD... just to be sure I have things straight:

On the LE, we'd list delinquent taxes in section F as payable by borrower because they have to be paid for us to close the loan. But then on the CD, we put them as seller paid, unless we're in an abnormal circumstance like you listed above. Right?

This is what we do. Taxes here are paid in arrears as well. If the seller is actually paying and not doing pro-rated, we show as seller expense. On refinances, if it is done around tax time and they are paying taxes out of proceeds we show as buyer expense.

ahk, what about on a purchase that closes on 8/30, two days before the second installment of taxes are due? Would you then just show a seller credit, or do you just require that they be paid at closing even though they're not technically due yet?

Not necessarily. I you know the seller will be paying them, you will mark them as paid by seller [depending on how your particular LOS operates, that is!] and that should then show a seller credit of that same amount to offset the total closing for accuracy/good faith purposes.

**IF** you know - typo above.

First re: 8/30 closing with taxes due in two days, any bill due within 60 days of closing should be paid at closing.
So you show the taxes due in two days on the seller's side and cut the check at closing to pay them.

Second, every state we deal in pays taxes in arrears. So any outstanding tax bill is the seller's responsibility and wouldn't show on our LEs at all. We would use the current tax bill as the basis of figuring the escrow but that's all.

We would pay at closing if not already paid.

I feel like I better understand the logic behind this now! But Truffle and Joker, it seems like you guys disagree on disclosing the taxes on the LE, but maybe I'm misreading what you wrote Joker.

Under the assumption that the seller is going to pay the property taxes, on the LE, do we:

1) disclose them in section F with a seller credit back to the borrower (which is what I think you said, Joker)
2) leave them off because it's a seller paid expense (which is what you said, Truffle)

I see both sides... on one hand, even though it's seller paid, it's something that has to be done for us to approve the loan. On the other hand, the seller is going to pay them, so the borrower doesn't need to see the cost and it just drives up the closing cost figure.

like OTI, even though it's seller paid, it's something that has to be done for us to approve the loan

Huh??

Good catch - I started typing, got interrupted, and switched thoughts mid sentence. We do not require OTI to approve a loan! Thanks Randy.

the creditor shall make the disclosure in good faith, based on the best information reasonably available to the creditor

You don't have to make things up when you are creating the LE - it is not a worse case scenario document. If you know for a fact (because you have a copy of the purchase agreement) that the seller is going to pay for something - you can either list it and the seller credit or leave it off. If it's customary for the seller to pay a non-tolerance item in your area you can leave it off. As far as taxes, if you anticipate the loan closing before taxes are normally required to be paid, then you leave it off. If the anticipated closing date is delayed, you can add it on a subsequent disclosure. If property normally has hazard insurance on a refinance loan, you can leave it off unless you either know the policy due date and you are going to collect based on that or that they do not have insurance then you put it on. If you figure this out later, you can add it. I think people are making this too complicated. You disclose based on the specific information you have at the time you issue the disclosure.

I think you're right that I am I just tend to overthink these things. So from what you said, we don't have to list them on the LE because it's customary for the seller to pay them.



You say that while still following the 60 day rule for taxes, right? Any taxes due within 60 days of closing are required to be disclosed aren't they?

Any taxes due within 60 days of closing are required to be disclosed aren't they?

No - not always. Only if you are planning on collecting them at closing. The statement in the commentary is an example:

Examples of periodic charges that are disclosed pursuant to § 1026.37(g)(2) include:

i. Real estate property taxes due within 60 days after consummation of the transaction;

But they are disclosed (like any other closing cost) only if you plan on collecting them at or before closing.

Let's say closing is 8/30, first installment due 9/1. We don't disclose because we aren't planning on collecting taxes at closing. The buyer would have to get a credit from the seller for that installment of taxes, correct?

They buyer would get an adjustment (page 3 of the CloD) for taxes for the portion of the tax period that the seller owned the property prior to the closing date, if the bill will be paid by the buyer after the closing.

To sum this up, then:

If it's customary for a seller to pay the taxes, we can leave them off of the LE. Then at closing, we show them as paid by seller in section F. If the buyer will be paying them after closing, we would disclose on the LE but also have a credit back to them from the seller which would also be reflected on the CD.

In the rare situation where we have a distressed sale or something similar and the buyer has agreed to pay the back taxes, we disclose in section F on both the LE and CD.

Right?

IL pays in arrears. The buyer didn't live in the house last year so the bill is the seller's. If they haven't paid it prior to closing and it's due, they will have to pay it to pass clear title. In my experience in your state, if the bill is available, the seller should pay the whole thing and be done with it. You don't have to wait for individual payment due dates.

We do loans in IL and I have yet to see a situation where the buyer was given a credit to pay the last year's taxes. But that does happen in Iowa and the IL fiscal year runs on a similar offset 7/1 -6/30 rather than the calendar year not to mention that IL is notorious for their lax tax handling so I won't say that having to credit a buyer for taxes not yet posted can't happen.

Truffle, that makes a lot of sense. My only question is what do you do before the bill is available, say on a purchase closing in January or February?

I would recommend having the seller credit the buyer for the estimated bill using the mil rate x the value.
That's assuming that IL sets mil rates early enough to be able to use in the calculation.
Otherwise, the best you can do is go off the last year's bill.