Are property taxes included in closing costs

Key Takeaways

• Closing costs are an important consideration in any real estate deal. Several fees and expenses apply in addition to the property’s sales price. These closing costs fluctuate according to location, type of property and what a lender may require.

• Property taxes have a huge impact on closing costs. Buyers will likely be required to reimburse sellers for any prepaid property taxes. It’s super important to check the closing statement for accuracy so you can pay any outstanding taxes.

• With a little bit of education on the purpose of closing costs, buyers and sellers can plan their budgets accordingly. These expenses pay for services such as legal services, inspections, title searches, and prorated property tax adjustments.

• Closing costs are the responsibility of both buyers and sellers. Buyers typically handle taxes and fees post-closing, while sellers cover taxes up to the closing date and other sale-related expenses.

• Setting a budget for closing costs is key, so you’re not blindsided with an excessive bill. It’s smart for buyers and sellers to sit down and really think through a budget, understand which fees are specific to their location, and make room for surprises.

• Remember to factor in other costs when purchasing or selling a home Moving fees, utility setup costs, and home warranties can all add to the tab. By understanding your potential closing costs before it’s time to close, you can avoid unexpected financial shocks.

Whether you’re a first-time homebuyer or not, closing costs when purchasing a home can be confusing. Perhaps the most popular question is, are property taxes included in closing costs.

Closing costs include a range of fees such as legal fees, title insurance and land transfer taxes. Property taxes, on the other hand, are usually prorated through a different process.

Buyers typically pay the seller back for any taxes they have prepaid, or take care of any remaining balance. Understanding these closing costs property tax details will make for a smoother transaction and keep them from coming as a surprise to your closing table.

What Are Closing Costs

Closing costs are a key part of finalizing any real estate transaction. Here are the closing costs you should be aware of. They are most visible when the buyer and seller have agreed to the sale and are moving to transfer ownership of the property. Closing costs might seem pretty straightforward, but closing costs cover a host of different services and payments. It’s important to understand their complete purpose and scope.

Definition of Closing Costs

Closing costs are the different charges that are due when a real estate transaction closes. These costs often aren’t factored into the property’s purchase price, but they’re required to finalize the deal. Buyers and sellers usually split these costs, based on what is negotiated in the contract.

For instance, buyers often take care of expenses like title insurance and legal fees, while sellers could be responsible for transfer taxes. Just to be clear, closing costs are not the same as the down payment or mortgage principal. They usually involve payoffs for third-party services such as property appraisals, legal documentation preparation and government recording fees.

Without these, the transfer of ownership can’t be completed. Whether you are a first-time buyer or veteran investor, understanding what role closing costs play will make for easier financial planning.

Purpose of Closing Costs

The role of closing costs is to allow for a smooth transfer of property ownership. These fees pay for things like title searches, property inspections, and legal work. They ensure that both buyer and seller abide by the terms of the contract.

A thorough title search also assures that the property does not have any current liens or claims on ownership. This ultimately shields homebuyers from unforeseen legal consequences. Knowing why these costs exist can better prepare both buyers and sellers to avoid any last-minute surprises.

It’s essential for buyers to budget for costs that extend beyond the purchase price of the home. This includes up-front mortgage default insurance that ranges from 2.8% to 4% of the loan amount depending on the down payment size. Sellers may need to set aside money for transfer taxes or other costs agreed upon in negotiation.

Having a clear understanding of these costs avoids any surprises on closing day.

Common Types of Closing Costs

Below is a breakdown of common closing costs that buyers and sellers should be aware of:

• Loan Origination Fees: Charged by lenders to process and fund the mortgage.

• Title Insurance: Protects buyers from title disputes, costing $150 to $5,000.

• Recording Fees: Covers the cost of registering the property transfer with local authorities. Can range from $500 to $1,500, depending on the property’s size and condition.

• Legal Fees: Often between $1,000 to $3,000, depending on transaction complexity. Ranges from $500 to $1,500, ensuring property boundaries are clear.

Note that certain costs, like transfer taxes and some attorney fees, are negotiable between buyer and seller. So don’t be afraid to negotiate these costs into your deal! However, others, like title insurance or certain government fees, are no negotiation and no variation in cost.

Components of Closing Costs When Buying a Home

Closing costs are the expenses buyers need to pay to finalize the purchase. These expenses are in addition to the home’s sale price. These charges add up fast. Typically they run from 2% to 4% of a home’s purchase price, depending on the home’s location and type, as well as the type of mortgage being taken. By understanding these different components, we can better prepare you for what to expect and ensure you’re financially prepared.

Deposit and Down Payment

While a deposit and a down payment both serve important functions in a real estate transaction, they are two distinct entities. Both of these factors affect the total closing costs. This deposit is typically due upon acceptance of your offer and held in escrow until the transaction closes. It acts as a measure of the buyer’s good faith.

The down payment is the amount of the purchase price that you pay at closing. You pay this at closing. To use the example above, if you’re buying a new home for $800,000 with 20% down, your down payment would be $160,000. Both figures directly impact the total cash required at closing, so be sure to plan accordingly!

Legal and Administrative Fees

Legal and administrative costs are unavoidable, though not unique to real estate transactions. These costs represent necessary services. They cover the cost of preparing and reviewing documents, conducting title searches, and ensuring that the sale complies with local laws.

Just take legal fees, which can easily reach $2,500 or more depending on your circumstances. Administrative fees often cover the cost of registering the home’s deed with local government officials. By reviewing these fees in advance, you can avoid shock and confusion and know exactly what you’ll be paying for.

Insurance and Title Expenses

These costs protect you and your new lender. For example, title insurance protects you from future ownership claims or disputes on the home. Its cost in Ontario varies from $250 to $1,000, based on the purchase price.

Lenders typically require homeowners insurance before closing, which will protect you (and the lender) from damages to the property. Don’t underestimate these expenses, which are essential to ensure your peace of mind and financial protection.

Property Appraisal and Inspection Fees

When buying a home, appraisals and inspections are incredibly important. A property appraisal protects you by ensuring that your new home’s value matches the value of the purchase agreement. This service ranges from $300-$500 depending on area.

Likewise, a home inspection provides a useful way to uncover any problems that might be lurking. In Ottawa, inspections are typically $350 to $600 depending on the size and complexity of the home. Understanding and accounting for these fees is key for avoiding abrupt and costly surprises.

Taxes and Adjustment Costs

Taxes and adjustment costs are another big chunk of closing costs. These can be prorated property taxes calculated according to the day you close. If the seller has paid their taxes for the year, you will need to pay them back.

This reimbursement only includes expenses incurred after you take title to the property. Real estate commissions, typically the second largest expense after closing costs, can be negotiated. Getting a handle on these adjustments will help you to better understand your final closing statement before it’s prepared.

Components of Closing Costs When Selling a Home

Additionally, if you are selling a home, knowing the components of closing costs is key. Understanding these figures will allow you to determine a realistic sale price while budgeting appropriately. These costs cover a range of fees and expenses that sellers need to consider to make sure a smooth transaction happens. Here are the main components, in order to help you better understand them.

Realtor Commission Fees

Realtor commission fees are typically the largest cost a seller pays when selling a home. These fees are usually based on a percentage of the sale price. In Ontario, they amount to an average of just under 5% and are split between the seller’s and buyer’s agents.

For example, on a home that was sold at $800,000, that home’s commission might be around $40,000. These closing costs are negotiable, so be sure to discuss realtor rates beforehand to avoid surprises. Many sellers opt for reduced-commission services to cut costs.

It’s important to weigh how those savings stack up against the first-rate service and expertise they could be losing.

Appraisal and Reporting Costs

Sellers will likely be responsible for appraisal fees as well, which are used to establish a home’s market value. This is especially important if your buyer’s lender needs an appraisal in order to approve the financing. Appraisal fees can vary widely, but most range from $300 to $500 based on the size and location of the property.

High-quality appraisals help sellers by ensuring they have a good basis for their price expectations and marketing strategy. At times, you’ll have to pay for additional property reports, like a property survey. Their cost may vary from $1,500 to $6,000 depending on the size and type of land survey needed.

Mortgage Settlement Charges

If there’s an outstanding mortgage on the property, sellers should be ready for these costs. These fees often consist of a real estate prepayment penalty which can be substantial based on the lender’s terms. For example, some lenders impose the payment of three months’ interest or an interest rate differential (IRD).

There might be a discharge fee to officially take the lender’s claim off the property title. By factoring these charges into your closing costs, you can make sure you’re financially prepared to finalize the sale.

Legal and Documentation Fees

Another important component of closing costs is legal and documentation fees. You go back and forth on important documents. These include the deed of sale, statement of adjustments, and mortgage discharge documents.

Sellers should budget from $800 to $2,000 for these services, although prices differ by company. It’s important to have a knowledgeable real estate lawyer by your side to navigate these areas and ensure a smooth process.

For example, delinquent property taxes or past-due utility bills could be included in the statement of adjustments. A lawyer makes sure all of these details are taken care of, shielding you from any future liabilities.

Are Property Taxes Included in Closing Costs

1. Role of Property Taxes in Closing

Property taxes are an important home buyer, seller and real estate professional consideration during the closing process. They are a reflection of the financial burdens associated with a property’s value and location. Municipalities determine these taxes by placing a value on each individual home.

They take the final amount and apply the tax rate they’ve calculated for that area. Buyers need to be aware of how property taxes can impact their total amount due at closing. These taxes will directly affect what they will owe in the years to come, too.

In Ontario, property taxes are hugely inconsistent from city or town to city or town. It’s important to understand the local rates in order to not get blindsided. Knowing what to expect with property tax obligations before closing is key to budgeting appropriately.

If the seller has already paid six months’ worth of taxes, the buyer will need to reimburse them at closing for the months they own the property. This reimbursement only goes from June through December. These costs are usually prorated so that both parties only pay for the period of ownership in which they occupied the property.

2. How Property Tax Adjustments Work

Property tax prorations help make sure the buyer and seller both pay their fair share of property taxes. These prorations represent the time period the seller occupied the home. This happens just prior to the buyer officially taking possession.

If the seller has paid the full year’s taxes upfront but is moving out in April, the buyer is compensating them. This reimbursement will bring taxes current from May going forward. This reconciliation process is usually explained on the HUD 1 closing statement, a detailed itemization of every penny that is coming and going.

Carefully reviewing this document is an important step to ensure property tax calculations are correct. Mistakes in these adjustments can lead to disagreements or even surprise charges later. It’s extremely important to address any differences before closing the transaction.

3. Prepaid and Outstanding Property Taxes

Two situations involving property taxes that buyers might face at closing are prepaid property taxes and outstanding property taxes. Prepaid property taxes are taxes the seller has already paid for the current tax year. If the seller has paid the full taxes for January through December, the buyer will owe them.

This payment includes the months that the buyer will be living in the home. Outstanding taxes are overdue property taxes that need to be paid at closing. This little step can save a headache by making sure the property’s tax account is up to date.

In other provinces, it depends. For instance, first-time homebuyers in Ontario can sometimes use a rebate to reduce their tax liability. Just knowing these kinds of opportunities are out there can help save money.

4. Calculating Property Taxes at Closing

There are many factors that go into calculating property taxes at closing. First, find out the annual tax rate for the property, as this can differ across local areas. Next, figure out how many days are left in the tax year starting from the closing date.

Using this example, if you close on July 1 the buyer would be responsible for paying property taxes from July 1 – December 31. To demonstrate, let’s say you’re buying a property with $4,000 in annual taxes. The buyer takes possession in the middle of the year.

As such, they are liable for 50% of the tax bill, or $2,000. So accuracy in these calculations is key to preventing a future dispute or an unexpected outlay of cash post-closing. Working with a real estate lawyer can help you understand what’s fair and what’s not, bringing clarity to the home-buying process.

Adjustments for Property Taxes During Closing

Adjustments for property taxes are a standard part of the closing process on any real estate transaction. These adjustments ensure that both the buyer and seller equitably pay their share of property taxes. They do this according to the periods of time that each party owned the property.

In short, it stops either party from overpaying or underpaying property taxes when ownership changes hands. If the seller has already paid property taxes for the full year, the buyer must pay the seller their portion. This reimbursement only applies to the fraction of the year that the buyer will own the property.

This helps ensure that all parties are treated fairly and equitably throughout the process and is explained in the Statement of Adjustments. Knowing how these adjustments work is important because they have a direct impact on your final closing costs. Having a good understanding of the numbers helps make sure nothing comes as a surprise when it’s time to close.

If closing occurs in the second half of the year, the municipality or taxing authority will most likely utilize that year’s Final tax bill. This bill is a step towards ensuring the precise tax bill paid is known. This level of precision prevents any potential miscalculations and guarantees that the closing totals are in line with the current property tax responsibilities.

Buyer’s Responsibility for Property Taxes

After closing, the buyer is liable for property taxes from the closing date forward. That just means budgeting for these payments is key to not set yourself up for a financial disaster. If the annual property tax is $4,000, first deduct the estimated $570 homeowner grant.

Then take that remaining amount and divide it by 365 days to get the daily rate. This formula allows buyers to make more informed guesses about their upcoming financial responsibilities. First-time homebuyers in Ontario receive land transfer tax rebates worth up to $8,475.

These rebates, which vary by state, can make up some of the upfront costs, such as property tax adjustments, more manageable. It’s still important to plan for ongoing tax payments to prevent any issues in the future.

Seller’s Responsibility for Property Taxes

On the seller’s side, they are responsible for property taxes through the date of closing. Since property taxes follow the property, any outstanding taxes should be cleared before the title changes hands. Communication is important here, as both sides must be sure that all tax liabilities have been cleared.

For instance, municipalities in Canada often base the Interim Tax Bill on half of the previous year’s Final Tax Bill. Sellers need to make sure these payments are current to prevent any issues at closing. Sellers—like buyers—deliver to one another an Undertaking to Readjust.

This is a legally binding commitment to amend any errors found in the Statement of Adjustments post-closing. This practice provides an added layer of protection, ensuring equity even if calculations have to be adjusted down the road.

Resolving Tax Prorations Between Parties

Property tax prorations are handled during the closing process to make sure that each party pays what they’re supposed to pay. As an example, if a closing occurs in July, the seller will be responsible for paying the property taxes up until that month. From there on out, the buyer pays the taxes.

Proper prorations have a direct impact on the final closing statement, the record of all closing costs, that itemizes each dollar paid or received by you. You can often get the figures you need for these calculations from the municipality’s Final Tax Bill.

If this bill is not yet available, then adjustments are made using the Interim Tax Bill or an agreed-upon estimate. In some extreme circumstances, these extra fees can quickly accumulate into a substantial amount, further underscoring the importance of precision.

Getting prorations right means there’s no ugly surprise waiting after the closing that could lead to potential litigation.

Budgeting for Closing Costs

Closing costs are a necessary and important part of any real estate transaction, but frequently they are not thought of until the very end. Budgeting for closing costs ahead of your home purchase can mean the difference between a smooth transaction and an unexpected financial burden.

By fully understanding and budgeting for closing costs, you’ll be ready for each step of the process.

Estimating Total Closing Expenses

Saving on closing costs starts with understanding what goes into them and where you can cut expenses. Here’s a breakdown of what to include when calculating these expenses:

In Ontario, property taxes, land transfer taxes, and municipal levies can add up – but they vary wildly based on where you live. When purchasing property in Toronto, be prepared for a second, municipal land transfer tax. This tax is not something buyers experience elsewhere.

Most lenders will require a home appraisal at the buyer’s cost, typically ranging from $300 to $1,000. If your mortgage is CMHC-insured, you must have 1.5% of the home purchase price available to cover closing costs. It is a measure of their ability to qualify.

Costs such as title insurance, land surveys, and home inspections depend on the type of property you’re purchasing. A home inspection usually runs between $250-$500, while a land survey can cost $500-$1,500.

Diligent research is a key component to generating a good faith, accurate estimate. As a rule of thumb, you should save 1.5% to 4% of your home’s purchase price and leave room in your budget for any unforeseen costs.

So on a $600k home, this would translate to needing $9,000 to $24,000 saved up.

Preparing for Unexpected Fees

No matter how comprehensive your budget may be, surprises can crop up in advance of closing. Unexpected fees, like adjustments on utilities or last-minute legal mandates, may crop up.

To prevent the last-minute headache, we suggest budgeting more than your expected closing costs. Be flexible—keeping a healthy financial buffer means you’ll be able to tackle any unexpected last-minute challenges without risking your deal.

Registration and title fees typically total $200. These costs are sometimes rolled into legal expenses, but they can vary based on the situation. Likewise, lawyer fees go from $1,500 to $2,500, based on how complicated the transaction is.

If you have additional funds prepared to absorb these differences, you can save yourself from the last-minute panic.

Saving Strategies for Buyers and Sellers

There are some things that both buyers and sellers can do to mitigate and lower closing costs. One effective strategy is to negotiate. This last tip might be more actionable for those who are already under budget on their closing costs.

For example, you can save a lot by shopping around for home inspectors or appraisal services. Additionally, sellers have some leverage with buyers to negotiate that they cover some costs, like land surveys or fees for negotiating legal agreements.

Planning ahead and saving in advance are keys to avoiding a heavy financial load. The earlier you start, the more time you’ll have to discover cost-saving opportunities and make sure you’re financially prepared.

Buyers and sellers alike can benefit from creating detailed budgets, researching potential expenses, and seeking professional advice to make informed decisions.

Additional Costs to Consider

When purchasing a home, it’s easy to want to focus just on typical closing costs. They usually consist of legal costs, land transfer taxes, and title insurance. However, there are a few other costs that you may incur at the closing table, and failing to account for them could put you under surprising financial stress.

Let’s take a closer look at these costs to better prepare you to plan.

Moving and Utility Setup Fees

Changing utility service is one of the most important steps when moving into a new home. Unfortunately, these steps can rapidly add up to significant costs. Plus, hiring a moving company can run several hundred dollars—more for long distances.

Renting a truck will incur extra costs too, especially if you have quite a bit to move. If you’re relocating within Toronto, it can really depend on the rate. Make sure you’re getting quotes from licensed, trustworthy movers so you can choose the best fit for your budget and situation.

Setting up all the utilities such as hydro, water, internet, and gas also have initial connection fees. Other providers might require deposits or installation charges, sometimes totaling $200 or more.

For instance, provisioning high-speed internet could involve recurring monthly fees, plus an initial activation charge. Knowing what utility providers are available, and inquiring about discounts for new customers can help you save money. Factoring in these costs will help you avoid any surprises and ensure a more seamless transition into your new home.

Home Warranty and Maintenance Costs

A home warranty is another cost to think about. Though not required, it can save you from unexpected out-of-pocket expenses in the long run if major systems — such as HVAC, plumbing, or electrical — go awry. These warranties often range from $300–$800 per year, depending on the level of coverage.

For first-time homebuyers, having that peace of mind through home warranty coverage means less stress in the first year of homeownership on a major repair. Maintenance costs are an unfortunate, unavoidable reality.

From minor repairs to routine maintenance, these costs can add up quickly, costing anywhere from a few hundred dollars to several thousand dollars each year. If your new home has a septic tank, you might be required to have that tested or inspected as well. This first service can run you in the range of $400. Factoring in these costs ensures you’re not caught off guard later on.

Miscellaneous Expenses on Closing Day

Closing day can be a time of surprise expenses. If the seller has prepaid property taxes for the year, you might owe them a prorated amount. This refund should be proportional to the part of the year that you will be the owner of the property.

This figure can be higher or lower depending on your property value and local tax rate. One possible cost is the charge for expedited paperwork. For condominium buyers, the Status Certificate Fee is capped at $100.

Home inspection, usually done before closing, typically runs in the neighborhood of $500 but can save thousands by shedding light on potential hazards. Having a plan for these odd costs will mean you’re ready and not scrambling at the last minute.

Conclusion

Closing costs can seem like a daunting hurdle, but with knowledge about what goes into them, we can budget better and think more strategically. Property tax is an important part of the overall process, typically prorated due to the timing of change in property ownership. These corrections are vital to ensuring equity in the treatment of buyers versus sellers. By understanding what goes into the overall closing costs, including other related expenses, we can sidestep unpleasant surprises and feel sure about what decision we’re making.

At LD Law, we help buyers and sellers navigate the entire process with practical counsel and custom-tailored service. So, whether you’re buying or selling, or looking to budget for your next move, we’ve got you covered. We’re real estate experts with decades of experience. Let us earn your trust as your guide, and you’ll be able to get to work with clarity and confidence! Contact us today to make your move easier and more convenient.

Frequently Asked Questions

What are closing costs?

Closing costs are the various fees and charges incurred when finalizing a real estate transaction. These are the services required to execute a legal transaction including real estate property taxes, legal documentation, title insurance.

Are property taxes included in closing costs?

In general, yes—property taxes are included in closing costs. Traditionally, buyers are charged prorated taxes for the portion of the year they will own the property.

What are prorated property taxes?

Property taxes prorated property taxes reflect the buyer’s portion of the annual property tax bill. This amount is prorated based on your closing date, and it’s part of your closing costs.

Who pays property taxes during a sale?

Property taxes are usually prorated at closing, meaning both the buyer and seller pay a share. Sellers are responsible for property taxes through the date of closing, with buyers responsible for the balance of that year’s taxes.

How can buyers budget for property taxes at closing?

Buyers need to be aware of the property tax history and prorated taxes in their closing costs estimate should be considered. Working with a real estate professional or closing attorney can ensure clarity on these costs.

Are property tax adjustments common during closing?

Yes, property taxes adjustments are standard at closing. These adjustments help make sure that any taxes owed on the property are properly apportioned between the buyer and seller based on when the transaction occurs.

What additional costs should buyers consider apart from closing costs?

Buyers should plan for moving expenses, home insurance, utility setup fees, and potential maintenance costs after purchasing the property.