Short Sale & Pre-Paid property taxes

Hi all - I hope I can frame my question clearly. Here goes:

I am awaiting bank approval of a short sale. I am the buyer.
The owner remains current on the primary mortgage. They have submitted short sale to 2nd mortgage holder - they are not current on this loan. 2nd bank says if I satisfy a modest lien the deal should go through and I am inclined to pay the lien at this point.

The primary mortgage escrows property / school taxes and as I said, this mortgage is current.
The town I am purchasing in receives tax payments Jan 1st for the year, so 2014 taxes should have been paid already by the primary lender out of escrow for the year.

If this were conventional sale, the owner would be due a credit but this is not a conventional sale.

So what gives? Will the tax bill be considered paid and I am tax-free for 2014?

I think the odd part here is that the primary mortgage will be satisfied and paid off in full at closing… it’s the 2nd mortgage that is in default - and they do not escrow anything.

Sorry for long question - but thanks for any insight.

Unless something is different in your area, property taxes are paid in arrears…meaning I just got done paying 2013 property taxes for all of our properties.

In your case, this means the escrowed money for taxes should have been recently disbursed and paid the 2013 property taxes.

A quick call to your county tax collector’s office or a visit to their website should clear up the confusion.

Sellers are responsible for property taxes for the portion of the year where they owned the property. In this case, you should get a credit from the seller (from his proceeds at closing) for the prorated taxes in 2014 for the period from Jan 1, 2014 to the closing date. This means on the HUD-1 closing document, the sellers proceeds will be lowered by the prorated amount. This will result in a credit on your side of the HUD-1 meaning it’s that much less money you have to come up with for the sale, but then you’ll have to pay the full 2014 tax bill when it’s due (because the seller gave you his portion of the 2014 taxes at closing).

Very helpful - thank you.
I’ll confirm that my town collects taxes in arrears - probably the case.

Still, since this is a SHORT SALE the bank is the “seller”. All proceeds go directly to the bank(s).
Should I expect the bank to credit me at closing for the tax period in 2014?

The town will still want a full year of taxes paid - who “pays” for the period that I do not occupy / own the home?
(BTW, annual tax bill will be approximately $10,000 - so somewhat significant… at least enough to make me care who “pays” for even a month or two)

Again, my thanks for your helpful reply!

Check out this article:
http://homebuying.about.com/od/shortsale/f/Who-Is-The-Seller-In-A-Short-Sale.htm

If the bank owned the home, who pays the taxes would be negotiable. I’ve bought properties from banks where they paid their portion of prorated taxes at closing in the form of a credit to me. I also bought a set of properties last summer where the deal was that I would pay the entire 2013 tax bill with no credit to me at closing for prorated taxes. Why did I agree to this deal? Because the bank sold me the properties at less than half of the current appraised value and I captured significant equity at closing.

In your situation, the prorated taxes should be credited to you at closing on the Hud-1 and the bank just gets a little less money because of that.

That was interesting. If the taxes remain unpaid, the tax authority can then use a tax levy to legally seize the taxpayer’s assets in order to collect the money it is owed. Tax liens are publicly recorded and may be reported to credit agencies. These two features of tax liens effectively prevent the sale or refinancing of assets to which liens have been attached, and prevent the delinquent taxpayer from borrowing money.

excerpt from http://www.investopedia.com/terms/t/taxlien.asp