Supplemental Taxes…The County May Owe You Money

Riverside, California (Westcoe Realtors)…If you have purchased property in Riverside County in the past 9 months to a year, chances are the Tax Assessor owes you money. Why is that?  Because of a very confusing process called supplemental taxes…which we will attempt to explain here.  However, before we can get to supplemental taxes (and your possible refund), you must first know a few things about how regular property taxes work.

Property taxes are essentially figured at 1% of your sales price.  They can actually be a little higher once the city ads on a few things in your area, but for conversational purposes here, just know that your property taxes on your new purchase will be 1% of what you paid for your property.  These taxes can either be paid in your monthly payment to your lender (called an impound account), or you can pay twice per year to the County Assessor when they are due. 

The Assessor works on a fiscal year, not a calendar year.  Their fiscal year begins July 1, and ends June 30…and the due dates for your property taxes are December 10 and April 10.  The December payment is called the “first half taxes” (only the government could call a payment made in December a ‘first half’ payment), and the April payment is called the “second half taxes.”  The December payment covers the time cycle, or taxes due, from July 1-December 31, and the April payment covers the cycle from January 1-June 30.  It is important to understand that instead of collecting monthly, the Assessor simply collects twice per year.  Thank goodness this is all the tax info you will ever need to know.

So…let’s talk about supplemental taxes…and our conversation begins with the close of escrow on your  new purchase.  When you closed escrow, all existing taxes then currently in place on your home were prorated as of the close of escrow.  This is a fancy way of saying that the seller paid the taxes on the home right up until the day it closed, and then you took over from there. 

HOWEVER (and this is a very key point), THE PRORATED TAXES PAID THROUGH ESCROW WERE BASED UPON THE SELLERS EXISTING TAX BILL…NOT YOUR NEW TAX BILL.  The County hasn’t figured your new amount yet (how can they…you just closed escrow), so escrow can only use the bill that is already in place…and unless you are paying the seller exactly what he paid for the home,  you can bet your taxes will be different…and, until the Assessor issues you a new tax bill for your new amount, you will continue to pay the taxes of record…the old sellers taxes.  So…what happens now?

 What happens is that the County Assessor will eventually “catch up” with their records, and when they do, two things will occur.  First, they will issue a new, accurate tax bill that you will now pay.  If you pay your taxes directly, then it will be sent to you, and you will begin this new payment with the next date tax payments are due (either the December or April date explained above).  If your tax payments are made by a lender from your monthly payments (impound account), then the bill will be sent to your lender, and they will make the new payment when due (and raise your monthly payment accordingly).

The second thing the Assessor will due is issue you a SUPPLEMENTAL TAX BILL, WHICH IS A BILL TO GET THEM CURRENT FROM THE DATE YOU CLOSED ESCROW ON YOUR HOME, TO THE DATE THE NEW PAYMENT WILL NOW BEGIN.  In other words, they not only want you to start paying the new, accurate tax payment with the next payment due, they want to “catch-up” with the accurate tax payment you should have been making the minute you closed escrow.  Let me give you a numerical example that may help.

 Let us assume the old seller paid $240,000 for his home way back when he bought it, and you come along a few years later and pay $480,000 for it now…a situation very, very common in the years 2000-2007.  I use these numbers, because if you apply the 1% property tax rule, the old seller’s taxes were $2,400 per year ($200 per month, if broken-down on a monthly basis), and your new taxes will be $4,800 per year ($400 per month).  Let us also assume that you closed escrow on March 1st. 

Here is how the taxes would work…and remember, everything tax wise is figured on the 6 month cycle I described above.  When you closed escrow, the existing tax bill of record is the annual $2,400 ($200 per month) from the old seller…and the prorations done in escrow would have meant that for the 6 month tax period that was in effect at the close, the seller would owe the 2 months he lived in the home (January and February), and you would owe the remaining 4 months to finish the cycle (March, April, May, and June).  So on your closing statement, it would show payments of $400 for the seller, and $800 for the buyer.  This would get everything paid until the end of the current 6 month tax cycle, at which time, the Assessor may have your new tax bill ready, and you would then begin to pay your new taxes of $4,800 per year ($400 per month, $2,400 every 6 months).

 Now note where the supplemental tax bill comes in.  You can see that for the first 4 months you actually owned the home, YOU UNDERPAID YOUR TAXES BY $200 PER MONTH…OR $800 TOTAL…AND THIS $800 UNDERPAYMENT WILL BE THE AMOUNT OF YOUR SUPPLEMENTAL TAX BILL.  All a supplemental tax bill does is get you caught up to your actual tax bill, which always comes later.  Why does it come later?  Because the Assessor needs to collect all the data on the sales of properties in Riverside County and prepare the new tax bills…and this takes time.

 So, as I noted in the title to this blog, WHERE DOES MY REFUND COME IN?

Well, in my example above, we assumed that the new price you paid for the home was greater than the price the old seller paid, and hence, you had a new higher tax bill.

BUT WHAT IF THE PRICE YOU ARE NOW PAYING IS LOWER THAN WHAT THE OLD  SELLER PAID…THEREBY GENERATING A NEW TAX BILL LOWER THAN THE OLD ONE?  This situation is very possible in the past 9 months, given the changes in our market place.  So what happens now?

 I’ll tell you what happens.  YOU ARE PROBABLY OWED A REFUND FOR WHAT YOU OVERPAID AT THE CLOSE OF ESCROW.  Chances are the old bill is higher than your new bill, so you were probably charged too much at the close of escrow (don’t blame your escrow officer…they MUST prorate on the existing tax bill).   

However, the real kicker here is that you will not necessarily automatically get your refund…you may have to ask the Assessor for it…and you may have to ask for it more than once.  The Assessor system automatically programs for INCREASED SUPPLEMENTAL TAX BILLS…BUT IT DOES NOT AUTOMATICALLY PROGRAM FOR REFUNDS.  Hey, it’s the government…what can I say. 

As a note, when we at Westcoe discovered what this market change had done with supplemental taxes, and that our clients were now owed refunds in many cases, we were told by the Assessors office that they would look into the matter…but currently had no policy for automatic rebates.  Hard to believe, but so be it.  We have called a few times since, but have no new information to report.

In summary, I honestly feel the Assessors Office for Riverside County will ultimately do the correct thing…but getting a government bureaucracy to make a change is like trying to turn an oil tanker…it just won’t happen very fast.  In the meantime, we simply encourage our clients to continue to call the Assessor to inquire about their refunds.  For now, it is all you can do.

I hope this blog today wasn’t too technical, and the bottom line is that if you are unsure if you are owed a refund, simply ask your agent…they should be able to tell you.  And if they cannot, then call us…we will tell you whether we worked with your or not.  We really are here to help.