Make no bones about it: Ohio property taxes are complicated.
And with today’s dramatic upwardly dynamic real estate market, it is more important than ever that buyers and sellers carefully consider the impact of a sales price that exceeds the Auditor’s valuation when writing a purchase contract’s tax proration provision.
Ohio’s complicated property taxation structure
First, taxes in Ohio are billed semi-annually, in roughly January and July of each year. Those two bills are, respectively, for the first half and second half of the prior calendar year. So, the January 2022 bill will be for the first half of 2021, and the July bill will be for the second half of 2021. Thus, when a buyer buys property, the seller owes between seven and thirteen months of taxes in arrears.
How tax prorations are typically addressed in “form” contracts
Typically, the purchase contract will provide for several things so that the seller credits these accrued but not-yet-due taxes to the buyer:
- First, there will be a proration of taxes from the seller to the buyer from January 1 of the year of the closing, or July 1 of the year prior to the closing, through the date of closing.
- (In what I consider to be a weird local custom, in the Dayton marketplace only, a “short proration” is many times utilized for residential and commercial transactions. The “short proration” ignores the first six months of arrearage, and prorates only on the part-half-year immediately prior to the closing. I do not know the logic behind this.)
- Second, the amount of that proration in a form residential and commercial purchase contact is typically to be “based upon the most recent available tax duplicate.” Many times the contract (and/or documents signed at the closing) specifies that the tax proration is to be considered “final.”
- [NOTE: The new Cincinnati Area/Dayton Area Board of Realtors standard form of residential real estate contract issued in the fall of 2021 is emphatic on this topic: Tax prorations are based upon “the most recent available tax rates, assessments and valuations” and “all tax prorations shall be final at Closing.”]
What does “based upon most recent available tax duplicate” mean?
On this, issue of prorating taxes “based upon the most recent available tax duplicate,” consider a few things:
- In Ohio, the starting point for the Auditor’s value is the actual value, i.e., what a willing buyer would pay a willing seller for the property. It’s the same number used by buyers, sellers, appraisers and lenders for the property value, i.e., the actual sales price. There is no other magical number. (Then, we speak in terms of 35% of that value as that is translated in the tax bill, but that number has no practical impact except to confuse people and does not change the analysis set forth in this blog entry.)
- Secondly, the “most recent available tax duplicate” means the taxes to-be-paid, which is valuation times tax rate on the Auditor’s records as of the date of closing.
- But both the tax valuation and the tax rate can change — with retroactive effect — all the way through the date the tax bill is issued in January of the following year, meaning well after the closing, or even by August or September of that following year when a tax valuation complaint before the Board of Revision is decided. Indeed, if a valuation complaint is appealed all the way to the Ohio Supreme Court, taxes could be assessed with retroactive effect two, three or more years after a closing date.
- (We primarily address valuation issues in this blog entry, but if a levy is on the ballot in May or November of any year, that rate increase also dates back to January 1 of that year, so a large tax levy can result in an inequitable tax proration as well.)
A sale price above Auditor’s value may result in a retroactive tax increase
In today’s dynamic real estate market in which sales prices of certain properties are galloping upward at an astonishing pace, especially for apartment buildings, single family residences, and industrial and warehouse properties, that standard form language could leave an unsuspecting buyer holding the bag. Here’s why:
- First, County Auditors update their valuations once every three years, and the cutoff for those updates is around September 30 of that year. So, for a sale in a “triennial year” (six different triennial cycles for Ohio’s 88 counties) prior to September 30 of that year, the Auditor should, on his own, increase the valuation to the sales price retroactive to January 1 of that first year of the triennial (even if the sale is late in that year), but that increase only becomes reflected on the tax records when the valuation comes out with the January bill of the year subsequent to the applicable tax year.
- But Auditor’s do not adjust values on their own after that date and in the “off” two years between the triennial valuation cycles. So, Hamilton, Montgomery, Butler and Clermont Counties most recently updated valuations effective January 1, 2020, and those values came out with the January 2021 tax bills. The Auditor’s of each of those Counties won’t “catch” a sale made after September 30, 2020 until the 2024 tax bills (values effective January 1, 2023).
- Ohio law says that — with narrow and rare exceptions — the sale price is the correct property valuation. Thus, property owners have a difficult time arguing that the contract sale price is not the actual value of the property.
- The contract sale price is reported to the Auditor with an “Real Property Conveyance Fee Statement of Value and Receipt” (“Conveyance Fee Statement”) signed by the purchaser at each closing. It is a felony to falsify one of these forms.
It’s easy to ascertain if the sale price is above the Auditor’s valuation. Each County publishes their valuations — current as of the date of contract signing — on its web site.
School districts can and do seek retroactive valuation increases
The biggest beneficiary of property taxes in Ohio is the local school board, which typically receives about two-thirds of the total tax bills into their coffers.
As a result, school districts hire attorneys skilled in property valuation matters to scour the Auditor’s records to find recent sales in their district that exceed Auditor’s valuation. Then, they file Board of Revision complaints to seek an increase in valuation. Some points on those complaints:
- Those complaints are filed, as with property owner complaints seeking a reduction, between January 1 and March 31 of each year.
- Those complaints by law seek a retroactive increase in taxes to January 1 of the prior year. So, for example, complaints filed in the first quarter of 2022 will apply retroactively to January 1 of 2021, and the increased taxes are a lien on the property as of that prior year (e.g., January 1, 2021).
- Almost universally, school districts limit their complaints to sales of a certain minimum variance from Auditor’s valuation (say, $50,000 or $100,000) and usually they ignore single family residential properties.
- The buyer — the new property owner — should receive notice of the complaint, and could appear to oppose the increase. But the an arm’s length sales price is, by law, the correct valuation and the Conveyance Fee Statement is usually prima facie evidence of both that contract price and the arm’s length nature of the transaction.
These school board complaints, if successful, have two effects: (i) in the tax year of the Complaint, it puts real cash in the pocket of the school district (very roughly about 3.0% of the valuation increase), and (ii) thereafter it ever-so-slightly reduces the burden on other property owners to have each property valued at its correct rate.
A post-closing surprise!
This means that buyers can get a surprise of a tax bill far in excess of the prorated taxes (otherwise by law owed by the seller) well after the closing date. And typically contract language and perhaps papers signed at the closing make this difference unrecoverable by the buyer as against the seller.
How to address this issue in the contract
From a buyer’s perspective, if he wants to recover a proration that will fully compensate him for taxes due (by seller) accruing prior to closing, he must deviate from the typical contract language that a tax proration is to be “based upon the most recent available tax duplicate” to add “but updated to reflect the sale price in this contract” or something to that effect. A further possibility with an entirely solvent seller whose operation would continue well after the closing would be to call for a re-proration after the actual taxes are known. But it’s far better to adjust at closing so a post-closing claim (or law suit) is not necessary.
If the issue is not addressed in the contract but brought up before or after closing, it may be difficult to argue to the seller that the contract does not reflect the seller’s actual tax liability as of the closing date.
From a seller’s perspective, it is better use the typical default language of “based upon the most recent available tax duplicate.”
Obviously, if the contract price is lower than the Auditor’s valuation, the default language” of “based upon the most recent available tax duplicate” would disadvantage the seller and benefit the buyer. This frequently was so in the last (and every) real estate recession, and may be true with isolated sales occurring today, or for certain categories of real estate such as restaurants and hospitality, parking garages, and retail. When this happens, a seller may want to ask to prorate based on the actual sale price rather than the “most recent available tax duplicate” information. In the alternative, the seller could preserve the right to pursue a reduction in valuation post-closing and receive any refund arising from an over-payment or excess proration.
For help with your commercial or residential real estate contracting matter, including the intricacies of Ohio and Kentucky tax prorations, contact Isaac T. Heintz (513.943.6654), Eli N. Krafte-Jacobs (513.797.2853), or Jennings D. Kleeman (513.943.6650) of our real estate group.