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Tax Proration and Payment Tips When Buying and Selling Real Property

By Bradley S. Dornish, Esquire

Last month, I was contacted by a seller who sold his home last August. He had been trying for months to figure out why he paid 2015/2016 school taxes through his tax escrow, paid more 2015/2016 school taxes at closing, and never got his money back. He thought when he came to me that the settlement company (not my settlement company) had cheated him on his tax proration, the division of the tax bill between buyer and seller.

I reviewed his Settlement Sheet from closing, fortunately an old form HUD-1, since the new TRID forms, the closing disclosures, are in separate parts for buyers and sellers, making the review harder, but not impossible. I saw that the settlement company for an August closing had properly asked for the school tax bills from the municipal tax collection agency, which happened to be Jordan Tax Service, and that Jordan in mid- July had reported the new tax bill amount, which it had just received, that the tax was unpaid, and that this remained true until shortly before closing.

The settlement company charged the seller for the full school tax bill on the second page of the HUD, and then had the buyer reimburse the seller for the portion of the tax which applied from the date of closing to June 30th of 2016, being all but about six weeks of the tax, in the section marked items paid by seller in advance. The settlement company sent its check for the full 2015/2016 school taxes, almost $3,500.00, which was received by Jordan Tax Service and deposited to the benefit of the school district, with the reference for the buyer of the property.

However, the seller’s lender had an escrow for taxes, and several days before closing, the escrow agent had sent an electronic funds transfer of the same amount, almost $3,500.00, from the seller’s money held in escrow. Thus, the school taxes had been paid twice for the property for the 2015/2016 school tax year. The school district saw on its records in September, that taxes had been paid twice, and also saw that the new buyer was the record owner of the property. The district issued its check for the overpayment to the buyer, with a letter explaining that the taxes had been overpaid, and the buyer happily cashed the check, and likely spent the money on items for his new home.

It took great cooperation from Jordan Tax and the school district to figure out what happened, and when the buyer understood that the refund he received belonged to the seller, he wrote another check to the school district, which finally issued a refund check to the seller late last month, over six months after closing.

Two buyers of property who closed (through my settlement company) early last July recently called and e-mailed us that they had received notices that their 2015/2016 school taxes were not paid, but they saw the proration on their settlement sheets, so something must not have been paid by the settlement company from closing. I pulled electronic copies of their HUD-1s, and saw exactly what had happened.

The school tax bills for the districts in which they bought property had not yet been determined by the districts or sent out in early July. There were no tax escrows, as one of the buyers paid cash, and the other bought with a loan which did not require a real estate tax escrow. We properly estimated the seller’s portion of unpaid school tax based on the prior year’s taxes for that property, charged each of the sellers and credited each of the buyers for a few days of school tax for the period from July 1 to the date of closing. We also had each buyer sign a form provided by the title company for which we are agents, which indicated that the tax bills hadn’t come out, the seller had been charged a prorated share of school tax for the new tax period based on the last year’s bill, and that the proration amount collected from the seller was final even if the tax bill went up.

Since two people in similar situations must not have understood the form they signed about taxes at closing, I rewrote the form to make it clearer.

I can explain in more depth in this article: When the tax bill isn’t out for school taxes in July or even into August, or for municipal and/or county real estate taxes in January or even February, the settlement company can only use its best approximation of the tax bill for the new tax year in prorating taxes, which is the bill for the prior year. If the new tax bill is not yet out, we can’t pay the bill, so we charge the seller his or her portion based on the prior year, and credit that amount to the buyer. That means the buyer will owe the whole tax bill for the new tax year when the bill comes out, and should be looking for a bill to pay if the money is not in escrow. Most municipal and county tax bills come out and are due sometime in the first quarter, as are Pittsburgh, Philadelphia and Scranton school tax bills.

If you have no escrow, and you don’t get a bill after you buy the property, ask for it quickly. Nobody else is going to pay your real estate taxes. If the bill goes to someone else after the deed is recorded in your name, and you miss paying the tax on time, most taxing bodies can and will waive penalties and interest, and collect the tax at face value only. Ask them to do that if you are late.

If you have an escrow set up when you buy a property, and the tax bills have not been finalized and sent out by the time you close, know that the escrow has been set up based on an estimated tax bill. When the escrow company gets the actual tax bill, if it went up from the prior year, they will pay the bill and it will result in a shortage in your escrow account. Usually, banks only analyze the escrow account once each year, so by the time the bank figures out you are short, you will owe the difference for both the present year and the next year. That means if your escrow account is short $120.00 for this year, your escrow payment will go up for a year by $20.00 each month, $10.00 for the current year shortage, and $10.00 to be sure the same problem isn’t happening with your escrow for the next year.

When you sell a property and you have an escrow account for taxes, make sure you know what tax bills are due around the time you are closing, and make sure the escrow agent for your lender is not in the process of paying the same taxes the settlement company is collecting from you at closing. You should get a copy of your payoff letter to see if the escrow balance is being subtracted from the payoff, or being reimbursed to you by the lender after closing. Typically, if it being reimbursed, you should get your reimbursement check within 30 to 45 days after closing.

When you sell a property on which you don’t have an escrow account for taxes, don’t pay tax bills after the date you have a signed agreement of sale by mail. Of course you should pay those bills as they are due, at discount if you can, but PAY THEM IN PERSON at the tax collector’s office, and get a paid receipt which you can provide to the settlement company before closing. This avoids the settlement company collecting for a tax you know you paid, but the tax collector has not processed before closing.

The author, Bradley S. Dornish is a licensed attorney, title insurance agent and real estate instructor in Pennsylvania. He can be reached at bdornish@dornish.net.

April 2016

Facts and Figures about Pittsburgh’s anticipated 2016 Rental Registration Ordinance

By Bradley S. Dornish, Esquire

In November of 2014, the Pittsburgh City Council had a public hearing on Ordinance 2014-1020, the Residential Rental Housing Registration Ordinance which would impose on each residential rental unit in the city a $65.00 per year registration fee. That hearing was well attended by landlords and others who objected to the ordinance as an attempt to impose a new tax only on residential rental units.

The proposed ordinance 2014-1020 is based on the draft ordinance negotiated between the city and groups which sued the City over the last attempted rental registration, but eliminates any inspections, removes the escrow of funds collected and other key terms of that draft ordinance, and leaves only a $65.00 per unit per year registration fee, increased from $12.00 per year in the prior draft ordinance, with exemption for hotels, motels, bed and breakfast establishments expanded to include public housing units, dormitories, certified rehabilitation facilities and long term medical care facilities. The ordinance proposed also allows owners who do not reside in Allegheny County to designate a responsible local agent for acceptance of legal notices, or to accept certified mail of legal notices at the owner’s address.

The ordinance was deferred for one year, and is now pending in the Council’s Public Safety Services Standing Committee, where it can be voted into law at any Standing Committee meeting or regular Council Meeting. No further public hearings are anticipated, and the revenue from the ordinance, anticipated to be $1,620,000 per year, is reflected as Account #42339 in the pending City Budget.

On November 18th, I attended the Standing Committee meeting, and was given five minutes to address the members of council present. I advised council that I was a City building owner, landlord, director of ACRE and Chairman of the board of PROA. I also advised council that I was a lawyer who represented plaintiff organizations against the City in 2007 and 2008 when we fought against the registration. I told them I strongly believed the proposed ordinance would raise revenue beyond the cost of registration, and therefore constitute a tax passed in violation of the Local Tax Enabling Act.

I reminded council members present that Act required state legislative approval of the increase in Pittsburgh’s Occupational Privilege tax just a few years ago, and the same would be required of any new type of tax. I also reminded them that we had received information from former City Solicitor George Specter just a few years ago that the cost to the city then of rental registration was between six and twelve dollars per year.

More than one member of council was supportive of my position, but a vote is anticipated and it will likely pass before the end of 2015. Contact the members of City Council where you own properties to express your objection to this proposed illegal tax, and your willingness to support Acre’s and other landlord groups’ fight against this tax once again.

PROA Regroups for the Long Haul on Student Housing Legislation

By Bradley S. Dornish, Esquire

After over a year of hard work finding the right language, a committed sponsor in the legislature, and the right timing to move forward, we had in HB 809 sponsored by Representative Sue Helm a vehicle we believed would protect students who wanted to rent off campus housing and the landlords who wanted to rent to them from arbitrary, biased and prejudicial local ordinances being passed in many cities and towns throughout Pennsylvania.

Some, like the City of Pittsburgh’s ordinance, limit the number of unrelated persons who can live in a single rental home or apartment. The magic number in Pittsburgh is three, and we have seen landlords with even four or five bedroom rental properties prosecuted by city code enforcement officers and fined hundreds of thousands of dollars, yes hundreds of thousands for renting to more than three unrelated persons. Other municipalities like Greensburg license student housing separately from other rental units, dictate in which areas of town students are permitted to live, and require that a student rental unit not be within 500 feet of another student rental.

HB 809 addresses both of these types of arbitrary restrictions, and if passed, will make ordinances which discriminate on the basis of matriculation subject to being invalidated by court action. On July 20th, a hearing was scheduled in front of the House Municipal Government Committee, and PROA affiliates from West Chester to Harrisburg to Erie and Meadville, and of course Pittsburgh, prepared to testify.

My written testimony traced the problems I have seen with Pittsburgh’s ordinance since the 1980s, beginning with the owners of a building I lived in as a law student. Those owners sued to get a variance to allow four students to rent two bedroom, two bath units in a high rise building nestled between Duquesne University’s old gym, Rockwell Hall, Fisher Hall and the Liberty Bridge. Clearly, the owners thought, this was not the type of building or location which the city intended to restrict to only three students per unit. The owners were wrong, and after years of expensive litigation, Pennsylvania appellate courts upheld the city’s right to limit student housing, and left it to the legislature to change the law. The owners sold the building to Duquesne University shortly thereafter, and the university houses as many students in the building as it sees fit, since college dorms are not subject to the city ordinance.

Other witnesses provided testimony about the effects of ordinances in other parts of the state on both landlords and students, including non-traditional students like returning veterans and how even married students with jobs could be affected by ordinances like that in Greensburg.

But Representative Kate Harper postponed the hearing several times, for various reasons, and by the time we had the opportunity to testify, well organized municipal groups opposing the passage of HB 809 including officials and landlords who lived in different college towns, were mobilized to speak and write to legislators against the bill. Witnesses told anecdotal stories of students urinating in public, having loud parties on weeknights lasting into early morning hours, of student cars making crowded streets unsafe, and students failing to keep houses yards and porches in a manner consistent with neighborhood standards. Municipal officials had Powerpoint presentations with charts showing that neighborhoods with student housing had not several times or even ten times the police calls as non-student neighborhoods of similar square mileage, but a hundred times the police calls, putting a terrible strain on municipal services and stress on their neighbors.

Witnesses supporting the passage of HB 809 were drowned out by the emotional pleas, disturbing anecdotes and incredible statistics presented by opponents. Some commented that if an ethnic, racial or religious minority had been substituted for the word student in the testimony of opponents, the prejudicial, over reaching bias of the testimony would be apparent to anyone. None of the opponents acknowledged that non-discriminatory ordinances already exist against things like loud parties disturbing the peace, public intoxication and public urination. In fact, they claimed the only way to deal with those activities is to keep most or all students out of their neighborhoods, since offending activities begin and end too quickly for police to prosecute if the students are there.

If you would like to hear some of the testimony, one supporting witness, and two opposing witnesses, and see the PowerPoint figures for yourself, search for Representative Kate Harper’s website, and click on the video excerpts from the hearing.

In the aftermath of the hearing, the PROA board met with our lobbyists and discussed where we go from here. We still believe that many local ordinances unfairly discriminate against students and other unmarried individuals in their housing choices, and prevent owners of multi-bedroom units from renting those units to many good prospective tenants just because of their student or marital status. However, the organization and passion of opponents mean that a more patient and deliberative course is required to get the justice and equity we seek for student and unmarried tenants and landlords who would rent to them.

PROA affiliates have filed Public Records Information Act requests which seek the raw data on which the statistics in the municipal government PowerPoint are based. We will need to analyze the data for multiple other variables between the districts being compared, such as density of population, socioeconomic factors between the districts, and other variables independent of student residence which would contribute to the deviation in police calls which the municipalities attribute entirely to student housing. Next, we will need to test the veracity of police call accounting to see if the data led to the result, or the desired result led to the data.

We can’t do much to combat anecdotal stories, but we can check local, non-discriminatory ordinances which exist in the communities where the stories arose, and ask why those ordinances were not used to combat the bad behaviors complained of. Finally, we must find our own anecdotal stories of good student and unmarried tenants who were discriminated against and landlords who have been unfairly prevented from renting their properties to the number of persons the properties can reasonable accommodate, such as only having three tenants allowed in a four bedroom house.

When we are ready for the information and emotion offered by opponents, we can come back to HB 809 and have a full discussion on its merits, and hopefully get it passed for the benefit of Pennsylvania.

In Act 167 PROA Sees Another Victory for Landlords Dealing with Abandoned Tenant Property

By Bradley S. Dornish, Esq.

Since the passage of Act 129 in the summer of 2012, landlords in Pennsylvania have had far more direction from PA law on how to handle personal property left behind by tenants who have vacated their rental units than was ever previously available. Our state organization, the Pennsylvania Residential Owners’ Association, (PROA) worked for many years to get that key piece of legislation drafted, through the legislative process, and to see Act 129 become law. Click here to read more »

National REIA Mid-Year Conference Brings Exciting News

By Bradley S. Dornish, Esq.

ACRE is the Western PA chapter of National REIA, the National Real Estate Investors’ Association. The association has given us connections to and feedback on the quality of national speakers, and has kept us up to date on issues facing real estate investors all across the country. Click here to read more »