An Efficient Approach for Calculating 2015 Tax Prorations prior to the Release of the 2015 State Equalizer and Tax Rate

2015 was an Assessment Year for properties located in Cook County, Illinois, and this tri-annual assessment, often provides an extra level of stress for buyers and sellers during real estate purchases.  Attorneys are often tasked with determining the potential tax credits and will work towards maximizing (or minimizing) the credit for their client. 

In Illinois, tax credit issues arise because property taxes are paid in arrears. This means a buyer will be responsible for prorated proportion of last year’s taxes (i.e. if a buyer purchased a home on 9/1/15, the seller will pay the buyer for 9 months of taxes and an estimated increase in taxes).  The typical solution is a lump sum credit from the Seller to the Buyer, as tax bills are often not issued at the time of closing. As result, attorneys are forced to estimate the future year’s taxes. In in a stable neighborhood, with stable market conditions, and a predictable tax history, most brokers present an offer with a 110% proration.  A 110% proration presumes next year’s tax bill will increase by 10% from the prior year. 

However, in an assessment year, like 2015, perorations are a bit more complex, especially in Cook County, as Mayor Emmanuel has made it clear Cook County residents will see an increase in assessed taxes – the exact amount. .  
If a Buyer, and his or her broker , enter into a contract with a 2015 or 2016 tax bill credit that recites a 110% tax proration only, the Buyer will likely receive an inadequate credit to fully cover the 2015 and 2016 tax bills  

It helps to understand what makes up the calculation of your property taxes to appreciate some of the approaches Attorneys can take. There are three elements in calculating property taxes: 1) assessed value, 2) tax rate, and 3) State equalizer. The calculation is as follows,

     2015 Tax Bill = 2015 Assessed Value X 10%  X  2015 Tax Rate  X 2015 State Equalizer

If any of these factors increase, so will the taxes. The difficultly transactional attorneys face at closing, is that they only have the 2015 Assessed Value, the 2015 Tax Rate , but the 2015 State Equalizer  are not available and will not be available until the first tax bills are issued . 

I, like many other attorneys, have begun seeing properties in Cook County receive 30-40% increases in their Assessed Value  in 2015.  With Assessed Values increasing by 30-40%, a 110% proration is unlikely to cover the total 2016 Tax Bill and the Buyer will be paying for the Seller’s obligation. 

An easy solution is to take a proration of 115% or 120%. Although, if you are a Seller or Seller’s Attorney, a higher proration is something to avoid.  The thought, or at least the argument against a higher proration, is that market dictates proration and, until further information is provided by Cook County, 110% is an accurate and fair proration. Still, here is an alternative approach some Attorneys have been using as a potential solution.

   2015 Tax Estimate = 2015 Assessed Value   x  2015 Tax Rate x 10%   x  2015 State Equalizer 

The above approach takes into account a 10% increase in the Tax Rate and multiplies it by the assessed value Cook County has estimated. In Sum, it uses the most current assessed value (2015) and multiplies it by the 2014 State Equalizer since the 2015 figure has not yet been released. Still, when the 2015 State Equalizer is released, Attorneys would be better suited to use that number.

Although, this approach is more time consuming and requires greater research, it may be appropriate for the Buyer or Seller who should be concerned about taking on a tax obligation when a flat proration when negotiations fail to procure a proration in excess of 110%.