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Real Estate Tax Basics for Cook County Transactions
Gregory A. Braun, Partner

Nothing confuses purchasers and sellers of real estate more than real estate taxes. Even experienced attorneys make mistakes in tax proration calculations and experienced homeowners miss important opportunities for tax savings. Having a basic understanding of real estate taxes will provide you with some comfort through the buying and selling process, as well as allow you to capitalize on every opportunity for available tax savings. This article explains real estate taxes by examining each key element.

The Basics.  The county assigns each property a property identification number (PIN). Some properties have more than one PIN, including large or double lots and condos with deeded parking spaces. Each PIN is taxed separately. Every property owner must pay their taxes even if they do not receive a bill in the mail. Click here to change the address where the Cook County Treasurer’s Office should mail the bills. In its simplest form, the tax bill is a product of the assessed value of the property multiplied by the tax rate, less certain deductions or exemptions.

The 1st Installment.  Property owners pay taxes in “arrears”, meaning that taxes paid in the current year represent the tax obligation from the prior year, just like income taxes. For example, individual taxpayers owe their income taxes by April 15, 2010 for the year ending December 31, 2009. Cook County assesses real estate taxes in two installments: the first installment comes out in February and the second installment comes out late fall. For Cook County property owners, the first installment amount equals exactly 55% of the prior year’s entire bill (the first and second installments combined). For other counties, the two installments are equal.

The 2nd Installment.  For Cook County property owners, the amount of the second installment is unknown until Cook County issues the final bill. The uncertainty is due to the fact that the amount of the second installment is a product of the new tax rate percentage that the county generates each year and the new assessed valuation that changes every three years. The tax rate varies annually as county expenditures fluctuate. By law, the County Assessor changes the assessed valuation every three years. One third of the county receives a new assessed valuation each year – each one lasting three years – called a Triennial Assessment. The north and northwest suburbs, south and southwest suburbs and city of Chicago itself rotate adjustment years – Chicago proper in 2009, north in 2010, and south in 2011, and so on. The final tax bill is calculated by taking the assessed value of the property and multiplying it by the statewide equalization factor and the tax rate, less any applicable exemptions. Visit the Cook County Assessor’s website to research your PIN and the assessed valuation for your property.

Exemptions.  The Homeowner’s Exemption is the most typical exemption claimed. This allows a property owner a deduction if the home was “owner occupied” as of January 1 of the taxing year. Other exemptions include the Senior, Senior Freeze, Home Improvement, Returning Veterans, Disabled Veterans and Disabled Persons. Click here for details on the various exemptions and to find out which exemptions your property currently receives.

Credits at Closing.  At a typical closing, the seller credits the buyer for the taxes that have accrued but have not yet been paid by the seller. This credit appears on the first page of the HUD-1 or RESPA, line 211 (the title company form with all the financial aspects of the transaction noted on it). For example, for a closing on February 16, 2010, the seller would credit the buyer for the second installment of 2009 (the first installment bill is out so the seller would be responsible for that amount). The seller would also credit the buyer for the 47 days of taxes accrued for 2010 – 31 days in January and the 16 days in February. Because no one knows the Second installment amount, the seller generally provides a credit in the amount of the last year’s tax, increased by 5% or 10%. The amount of the credit can be more or less based on the tax characteristics of property, including if the new assessed valuation is issued for the new triennial (as explained above). Visit the Cook County Treasurer’s website to determine the current tax on your property. You should visit this site and confirm that the Treasurer credited the tax payment to your PIN.

New Construction.   Some properties have unique characteristics that negate the typical credits applied at closing. For example, a new home or condominium will have a much higher tax bill than the vacant land or demolished structure it replaced. In that case, a multiple of the property’s selling price may be used as a credit, usually somewhere between 1-2%. Alternatively, funds may be held in an escrow for a recalculation of the tax when the first bill issues, known as a reproration or “repro.” There is no one rule, and schemes vary from deal to deal.

Tax Appeals.  An appeal is a formal request to review the assessed valuation of the property. A property owner has about 30 days from the issuance of the Notice of Assessed Valuation to file an appeal. An appeal can be based on lack of uniformity (over valuation as compared to similar properties in the area) and vacancy, among other factors. The tax appeals process is a complicated matter that should be handled by an attorney with extensive experience with such matters. The attorneys at McCormick Braun Friman, LLC would be happy to assist you in this endeavor.

Lender Tax Escrows.  Even if your lender pays your taxes through your escrow account, you should track whether the lender has, in fact, properly paid the taxes. The lender’s statement may indicate that the tax was paid from your account, but you must be sure that your particular PIN was paid (remember, condominiums may have a separate PIN for a deeded parking space). Click here to confirm payment of the taxes. The lender will adjust the monthly escrow amount as the tax bill changes. This amount is on the second page of your HUD-1/RESPA, line 1004. If the bill increases dramatically, you will have to mail in the difference or pay the amount over time until you catch up with your lender.

As you can see, there are many issues surrounding real estate taxes beyond just making the payment. It is important that you retain a real estate attorney who understands the ever changing rules and regulations affecting property owners to help you take advantage of tax savings and protect what can be the single largest investment you make.