Minnesota Residential Real Estate Purchase Agreements – Real Property Taxes
Minnesota Residential Real Estate Purchase Agreements – Real Property Taxes
Lines 68-105 of the 2012 version of the Minnesota Association of Realtors (hereinafter, the “Association”), primary purchase agreement (hereinafter, the “Association’s Agreement”), address the issue of real property taxes.
Unpaid Real Property Taxes – Real Property Taxes Payable in Prior Years
Since unpaid real property taxes are a lien on the property, lines 68 and 69 of the Association’s Agreement impose an obligation on the seller to pay all real estate taxes and penalties due and payable in all years prior to the date of closing.
Real Property Taxes – Special Assessments
Unlike general real estate taxes, special assessments are “bonus” real property taxes to pay for things like street improvements, installation or repair of sidewalks, or upgrades to the park system.
The costs related to special assessments are often spread over several years.
Real Property Taxes – “Green Acres” Taxes
“Green Acres” taxes are a special form of deferred property taxes identified in M.S. Section 273.111, which were designed as an incentive for agricultural real estate exceeding 10 acres in size to remain undeveloped, thus providing green space in a given area for as long as possible.
Real Property Taxes – Deferred
Lines 70-71 of the Association’s Agreement provide the parties with an option as to whether the buyer or the seller shall be responsible for the payment of any:
- “deferred real estate taxes” – such as “Green Acres” taxes, or
- special assessments,
the payment of which may be required in order to close the sale transaction.
This section is somewhat confusing because unpaid real property taxes from prior years – which in a manner of speaking have been deferred – are addressed in lines 68 and 69 of the Association’s Agreement.
Likewise, special assessments are specifically addressed in lines 72-84.
Real Property Taxes – Installments of Levied Special Assessments
Lines 72-74 of the Association’s Agreement provide the parties with an option as to whether the buyer or the seller shall be responsible for the payment of any installments of levied special assessments which are otherwise due and payable at the same time as the general real estate tax payments.
Usually, unpaid installments of levied special assessments are prorated between the parties to the date of closing in the same manner as the general allocation of real property taxes.
Other Special Assessments Levied as of the Date of the Purchase Agreement
Lines 75-76 of the Association’s Agreement provide the parties with an option as to whether the buyer or the seller shall be responsible for the payment of all other special assessments levied as of the date of the purchase agreement.
Special assessments are often paid over a number of years.
Special assessments that are not payable in the current year, but have been “levied” by the appropriate government office, are still a lien on the property, even if they are not payable in the current year.
The unpaid balance of any special assessment not payable in the current tax year can be large if it relates to a street improvement.
Sometimes, the terms of a mortgage loan obtained by the buyer will require the seller to pay all special assessments which have been levied by the closing date – even if they are not payable in the current year.
For that reason, it is not unusual for the seller to be asked to pay the entire unpaid balance of the levied special assessments.
The amount of any unpaid balance of levied special assessments can usually be determined from the County real property tax web site.
Therefore, there should be no surprises in regards to the amount of any levied special assessments.
Nevertheless, both parties should negotiate the appropriate allocation of such special assessments between the buyer and the seller.
Note that the purchase agreement makes an allocation of any special assessments which were levied as of the date of the purchase agreement.
However, if there is an extended period of time between:
- the date of the purchase agreement, and
- the date of closing,
consideration should be given to the possibility that special assessments may be levied between the date of the purchase agreement, and the date of closing.
Which party will be responsible for such special assessments in that situation?
From the buyer’s perspective, if the seller is going to be responsible for paying all levied special assessments, then the buyer would want that determination to be made as of the date of closing, and not the date of the purchase agreement.
From the seller’s perspective, if the seller is going to be responsible for paying all levied special assessments, then the seller would want that determination to be made as of the date of the purchase agreement, and not the date of closing.
Real Property Taxes – Pending Special Assessments
Pending special assessments relate to those improvements for streets, parks, or sidewalks which have been approved by a city Council or other governing body, but not yet levied as a lien against real property by the appropriate government office.
Lines 77-80 of the Association’s Agreement provide the parties with an option as to whether the buyer or the seller shall be responsible for:
- payment – in the case of a seller, or
- assumption – in the case of a buyer,
with respect to all pending special assessments as of the date of the purchase agreement, for improvements that have been ordered by any assessing authorities.
Some would argue that it would be fair for the buyer to assume responsibility for all pending special assessments, because the seller would not have any opportunity to enjoy the benefit of such infrastructure improvements to be made in the future.
Contractually imposing financial liability for any pending special assessments on the buyer also makes closing of the transaction easier because of the uncertainty involved in trying to contractually impose financial liability for a pending special assessment on a seller with respect to the cost of an improvement which may not have even been determined yet.
However, if the seller has contractual financial liability for pending special assessments which have not yet been finally determined by the assessing authorities, then the seller will be required to escrow an estimate of the amount of any pending special assessments.
Such an escrow could be avoided if the buyer contractually assumed liability for all pending special assessments.
Lines 85-94 of the Association’s Agreement allow the seller an opportunity to make a representation as to whether or not the seller has received notice of any pending special assessments from any assessing authority with respect to a new infrastructure project.
Those same lines also address various contingencies depending on whether the buyer discovers any pending special assessments between the date of the purchase agreement, and the date of closing.
Real Property Taxes – General Taxes Due in the Year of Closing
Lines 95-98 of the Association’s Agreement identify the manner in which the general real property taxes payable in the year of closing are to be addressed at closing.
Typically, such real property taxes are allocated between the buyer and the seller based on the number of days during the year that each party owned the property.
Real Property Taxes – Homestead Status
Lines 99-100 of the Association’s Agreement allow the seller an opportunity to make a representation and a warranty with respect to whether the real property qualifies for:
- full Homestead property tax status,
- partial Homestead property tax status, or
- non-Homestead property tax status.
Since the Homestead status for real property tax purposes may significantly affect the amount of real property taxes payable by the buyer after the date of closing, the buyer may have an interest in obtaining an accurate representation and warranty as to such matters from the seller.
Lines 101-105 of the Association’s Agreement allow the parties to require the seller to pay the buyer at closing a certain dollar amount in order to compensate the buyer for any partial or non-Homestead classification of the property.
Minnesota Residential Real Estate Purchase Agreements:
Real Property Taxes
Please contact Minnesota Attorney Gary C. Dahle for assistance with the preparation, or review, of any Minnesota real property purchase agreement.
If you have an e-mail account, and a good Internet connection, Attorney Gary C. Dahle can assist you in any Minnesota County.
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