Mill Levy and Previous Year Tax Prorations – Boulder CO Real Estate Agent
Section 16.1 (Taxes) of Colorado’s standard form Contract to Buy and Sell Real Estate (Residential) addresses prorations of personal property taxes, special taxing district assessments, and general real estate taxes for the year of closing. These prorations are calculated as of the closing date and, depending on which box is checked, are based on either “Taxes for the Calendar Year Immediately Preceding Closing” or, as is more common, “Most Recent Mill Levy and Most Recent Assessed Valuation.” This webpage will provide an overview of real estate taxes in Colorado and discuss why and under what circumstances either of the boxes in § 16.1 should be selected.
As with all information on this website, the information presented on this page is meant for general educational purposes only, does not constitute legal advice and does not establish an attorney-client relationship. Property tax prorations are complex and some (or all) of the values mentioned in this article are likely to change in the future.
Property Taxes and Mill Levies
In Colorado, all real estate is re-appraised in odd-numbered years (e.g., 2019 and 2021). The county assessors determine the “actual” (i.e., market) values of properties and multiply those amounts by the assessment rate to determine the “assessed values.” The assessment rate has remained steady at 29% for commercial, industrial, and vacant real estate. For residential real estate the assessment rate is more likely to vary from year to year. The residential assessment rate is 7.2% as of 2018.
Once the assessed value is determined, that amount is multiplied by the sum of all mill levies to determine taxes due. The concept of “mill levy” is simply a way of conveying information about property taxes. One mill is equal to one dollar of property tax for every $1,000 of assessed value, so the multiplier for mills can be determined by moving the decimal place over three digits to the left. For example, to multiply an assessed value by 110 mills, move the decimal three digits to the left, leaving you with a multiplier of .110. Mill levies are set by local taxing authorities (e.g., counties, cities and towns, fire protection districts, library districts, water and sanitation districts, and school districts).
For an example of how mill levies work in practice, let’s find the property taxes due for a residential property with an actual value of $500,000. The sum of all mill levies is 110. To calculate the taxes due you would take the value of the property ($500,000) and multiply it by the current residential property assessment rate (e.g., a multiplier of .072) to get the assessed value ($36,000), then you would take the assessed value and multiply it by the mill levy (multiplier of .110) to determine the total amount of property taxes due ($3,960).
Property taxes are paid in arrears in Colorado. Property tax bills for preceding years are mailed out by counties promptly after January 1st of each year. Property taxes may be paid in one lump sum no later than April 30th or, as is more common, in two equal payments no later than the last day of February and June 15th, respectively. Most mortgage lenders collect estimated taxes due over the course of the preceding year and pay those taxes on behalf of homeowners in two separate payments the following year.
Section 16.1 – Most Recent Mill Levy and Most Recent Assessed Valuation v. Taxes for the Calendar Year Immediately Preceding Closing
Going back to § 16.1 of the real estate contract, it is more common to see the box checked for “Most Recent Mill Levy and Most Recent Assessed Valuation” than it is to see the box checked for “Taxes for the Calendar Year Immediately Preceding Closing” because it is generally considered to more closely approximate the actual taxes that will be due. Mill levies are frequently passed prior to the end of the preceding year and, in odd-numbered years, real estate is re-appraised, meaning it’s very common for taxes to go up year-over-year. If the taxes for the calendar year preceding closing are used as the basis for calculations rather than the most recent mill levy and assessed valuation then the buyer will often end up receiving a smaller credit from the seller for pro-rated property taxes, with that credit being less likely to cover the buyer’s actual taxes due for the period of time the property was owned by the seller.
There are, however, circumstances when neither option may be entirely fair to the buyer. For example, a dramatic increase in value prior to the property’s value being re-appraised for the year (e.g., a house was built on vacant land during the year or significant additions that enhanced the value of the house were made) could mean that the buyer could be paying much more in property taxes for the portion of the year in which the seller owned the property than was prorated as of the closing date. In those cases it may be in the best interest of the buyer to stipulate that the tax pro-ration will be based on a value more similar to what the property is expected to be re-appraised at. In a new construction situation, this value may be the purchase price of the home.
If you are looking for Boulder real estate agents with a results oriented approach tailored to your specific needs, contact Royal Arch Real Estate. We are knowledgeable and experienced brokers who always have your best interests at the forefront of our minds, whether you are buying or selling a home, vacant land or a new construction.