Buyer Beware: Your Property Taxes Will Go Up

By: Michelle E. Reid

Everybody knows it: certain commercial and residential property transactions rage on in the Cincinnati and Northern Kentucky areas despite COVD-19. Chalk it up to low interest rates, homeowners who need more space, or investors that are trying to squeeze something out of 2020—whatever the reason, certain segments of both markets are hot and prices are shooting up. Although it is not the most exciting aspect of any deal, buyers in this market need to understand how the increased purchase prices will affect their real estate taxes.

It is customary in the Cincinnati and Northern Kentucky real estate markets for buyers and sellers to base the real estate tax proration at closing on a county’s current valuation of the property which is usually the price the seller paid for the property. Banks also use the current valuation when they are estimating how much to hold in escrow accounts for eventual real estate tax payments. However, most property owners are shocked when they receive the tax bill for the year of closing in Ohio or the year following the closing in Kentucky because the valuation of the property will likely jump to match the price the buyer paid.

When it comes to commercial transactions, Kentucky and Ohio buyers can mitigate this increase by properly allocating the purchase price to personal property versus real property or convert the transaction to a purchase of membership interests in a property-holding LLC (under certain circumstances). Commercial buyers in Ohio can also negotiate a reconciliation of the tax bill with the seller that will occur when the actual valuation for the year of closing is set.

Residential buyers in Kentucky and Ohio do not have as many options. In either state, when a loan is involved, residential buyers can specifically ask the lender to base the escrow account balance on the purchase price and not the current valuation. This will also provide a realistic idea of what the property will cost to own after closing. Ohio residential buyers can negotiate a reconciliation of the tax bill with the seller too, but savvy sellers will catch this and oftentimes the cost of negotiation begins to eat into any savings on the increased taxes.

2020 has been full of surprises. A little foresight and preemptive action could go a long way to help you avoid this one in 2021.