What are those confusing numbers that take place before the closing and at the closing that lawyers and title companies refer to as “adjustments” or “closing adjustments”? They are really not as complicated as they first appear.
The main adjustments in your average home sale is for taxes. Depending on the town, village, or city that you live in, you may pay a number of different taxes during the course of the year. They are generally referred to as “real estate taxes” because the amount you pay is tied back to your property and its assessed value. However, these real estate taxes often consist of sub-sets of taxes such as School Taxes, Town/Village Taxes, County Tax, Sewer Tax, etc. And sometimes a few of these taxes are lumped together – again, it really depends upon the municipality in which you live.
To make matters a little bit more complex, each subset of taxes is due at a certain time. Some taxes are due once a year, some twice a year, or even more frequently depending on your local tax rules. In addition, each payment will cover a different time period. Usually, taxes due once a year will cover a full year but this time period can be the calendar year (Jan 1 – Dec 31) or can start in another month and span a one year period. Likewise, taxes due twice a year will usually cover a six month period of time but the municipality will decide the time period for each payment. Let’s take an example to see how a tax adjustment works and is calculated:
Joe lives in White Plains and is selling his house to Judy. White Plains has a yearly State, County, Sewer Tax in the amount of $2000 that is due each year by 4/1 and covers the calendar year from 1/1 to 12/31.
Let’s say that the closing takes place on 5/1. In that case, Joe has paid the $2,000, which covers the entire calendar year. Therefore, Judy will be able to unfarily benefit from the fact that Joe paid this tax through 12/31 since she will live in the house until the end of the year unless Joe is provided with a credit. Therefore, an adjustment will be credited to Joe for the amount of tax that he paid that will cover Judy’s residence in the home.
First we figure out the cost of this tax per day (referred to as per diem) – $2000/365 days in the year = $5.48 per day.
Second, we figure out how many days Judy will be living at the home for the taxes that Joe paid. 5/1 – 12/31 = 245 days.
Then we take the per diem ($5.48 per day) and multiply it by the amount of time Judy will be living at the home (245) = $1,342.60
This $1,342.60 will be provided as a credit to Joe at closing for the taxes that he paid covers Judy until the end of the year.
Taxes are very common but some other adjustments include the following:
Call Danziger Legal PLLC today for any questions regarding selling your home or purchasing a home! Our firm will guide you through each process of buying and selling a home and explain the details and answer any questions you have.