Impact of Changing from Assessments to Taxes
Impact of changing from an HOA assessment to a property tax levy to fund Township services
The Texas legislative session of 2007 provided specific legislation allowing The Woodlands Township to expand its boundaries and enter into Regional Participation Agreements with the Cities of Houston and Conroe subject to a confirmation vote of the residents. This confirmation vote was held in November 2007 and The Woodlands voters approved propositions to expand The Woodlands boundaries, implement a property tax to eliminate the Community Associations’ assessments, reduce the overall tax / assessment rate from 2007 levels and provide for a resident elected Board of Directors. Among other things, the voters considered the benefit of having a property tax that was tax deductible for federal income tax purposes versus community association assessments that were not income tax deductible.
To implement the voter approved changes, The Township entered into a transition agreement with the Community Associations which specified that the earliest date for the implementation of the initial property tax levy would be in 2009 for the 2010 budget year. It was agreed upon by the entities that the official date for the transition of services from the Community Associations to the Township would be January 1, 2010 (the transition date).
The Community Associations levied their final assessments in November 2008. This assessment was called the 2009 assessment and was due on January 1, 2009. The revenues generated from this assessment fee were used to fund 2009 budget costs. The budget period funded by the assessments was January 1, 2009 to December 31, 2009.
In anticipation of the January 1, 2010 transition date, in August 2009 the Township Board of Directors levied its first property tax. This tax was called the 2009 property tax and was due on January 31, 2010. The revenues generated from this property tax were used to fund 2010 budget costs. The budget period funded by the initial property tax was January 1, 2010 to December 31, 2010.
When implementing the transition from the Community Associations’ assessments to a Township property tax levy, the Township did not change the fiscal year or the budget period. As a result, the property tax levied by the Township in August 2009 paid for its 2010 budget costs in the same manner that assessment fees levied by the Community Associations at the end of 2008 paid for its 2009 budget costs. Even though the property tax levy was funding the Township’s 2010 budget, it was referred to as a 2009 property tax in accordance with state law requirements that dictate that the tax year must relate back to the date of property valuation. Accordingly, the property tax levy authorized by the Township in August 2009 was referred to as the 2009 property tax because it was based on applying an approved tax rate to the value of taxable property within the Township as of January 1, 2009 as determined by the Montgomery County Appraisal District.
There was no financial benefit that accrued to The Woodlands Township when the Community Associations ended their assessments and the financial responsibility was assumed by The Township under a tax levy. The Community Associations’ 2009 assessments paid for the Community Associations’ 2009 budget costs, and the Township’s 2009 property tax paid for The Township’s 2010 budget costs. The Township’s levy of a 2009 property tax effectively replaced what would have been the Community Associations’ levy of a 2010 assessment fee had the Community Associations continued to operate. The Woodlands Township’s 2009 audit report validates this fact by reserving any collection of 2009 property taxes paid prior to January 1, 2010 for 2010 budget purposes. All 2009 property tax collections were used to fund 2010 budget costs only.
The major issue with this change from an assessment to property tax was that it created a difference in the way that title companies prorated property taxes between the buyer and seller upon the sale of a home. A title company prorates a tax based upon the lien attachment date of that tax. In the case of the Community Association assessment s, the title companies determined that the lien attachment date was January 1 of the assessment year, which coincided with the due date of the assessment. For example, the 2009 assessment was due January 1, 2009 and a lien attached to any property with unpaid 2009 assessments as of January 1, 2009. Consequently, a homeowner who had paid his 2009 assessment on time and then sold his home on June 30, 2009, would have had no liens and would have received a credit on his closing statement for the six months (July 1– December 31, 2009) of Community Association assessments that he paid “in advance” for 2009.
Contrast this to a home that sold on June 30, 2010. The title company would prorate six months of property taxes based on a lien attachment date of January 1, 2010 for the 2010 property tax levy. Even though the 2010 property tax would not be levied until August 2010 and wouldn’t be due until January 31, 2011, it would be based on a property assessment valuation date of January 1, 2010, which becomes the lien attachment date. In other words, the title company would consider the 2010 property tax as an obligation accruing as of the valuation date/lien attachment date (January 1, 2010) and would prorate accordingly for the six months ended June 30, 2010.
So what is the net impact of this change? Assuming the Community Association annual assessment levy for 2009 was $1,000 and the Township property tax levy for 2009 (2010 budget year) was $1,000, what would a resident who purchased a property on June 30, 2009, and then sold it on June 30, 2010, have paid in assessments and property taxes?
? On June 30, 2009, resident John Doe would have paid the seller $ 500 at closing to reimburse the seller for Community Association assessments paid in advance on January 1, 2009.
? On or before January 31, 2010, John Doe would have paid to The Woodlands Township $1,000 for 2009 property taxes (lien attachment date is January 1, 2009 / funding used to pay 2010 budget costs).
? On June 30, 2010, John Doe would have paid $ 500 to buyer at closing as a tax proration for the Township’s 2010 property tax (lien attachment date was January 1, 2010).
In summary, the net impact of these property transactions was that John Doe paid $1,000 to the Township for property taxes and paid $1,000 to others in tax allocation payments ($500 to seller on June 30, 2009 and $500 to buyer on June 30, 2010). In this example, the seller in 2009 would have used the proceeds received from John Doe to reimburse himself for the 2009 community association assessments he paid “in advance” in January 2009. The buyer in 2010 would have used the proceeds received from John Doe to reduce the 2010 property tax payment that will become due on January 31, 2011.
Under this scenario it is true that John Doe paid more taxes than he would have paid had the associations continued to exist. This is due to transitioning from an assessment paid “in advance” to a property tax paid “in arrears” and because of the way title companies typically handle such tax situations. However, it was not the Community Associations or the Township that benefited financially. It was the buyer who purchased the home in 2010 after the transition date who benefited because the seller is in effect paying for services that the buyer will receive in the current or subsequent budget year.
Although a title company’s common practice is to prorate any accrued tax liability at the time of closing to the seller, there is no absolute requirement that it be handled that way. The title company’s primary interest is satisfying any outstanding tax lien at closing. This can be accomplished by the seller paying accrued prorated taxes at closing or by the buyer agreeing to assume financial responsibility for the accrued prorated tax liability. The seller may also request that the buyer reimburse him for any property tax previously paid that relates to the current budget year. If the buyer agrees to this reimbursement and agrees to assume any accrued prorated tax liability, the seller eliminates the negative financial impact described above.
When transitioning from a homeowners association assessment (with no state law requirements) to a property tax levy which has specific state law requirements, The Woodlands Township was required to comply with those state law requirements as they apply to property taxing entities in the State of Texas. The Township has the ability to enact a property tax, but does not have the ability to direct the title companies in the proration of taxes.