No one will dispute that 2020 was a crazy year. That craziness has affected property taxes, and its effects will continue to impact real estate closings at least through 2021.
COVID-19 adjustment to assessed values
Your clients may have recently received a notice from the Cook County Assessor’s office about a COVID-19 adjustment to their assessed value. Because of the economic effects of the pandemic, the County has reduced the assessed value of all homes in the county (not just those on the normal reassessment schedule) as well as many commercial properties. (For more information, see the Assessor’s COVID-19 FAQ.) Don’t celebrate too soon, though. In most years, if a property’s assessed value is reduced, it usually indicates that the tax bill will go down, too. That’s not the case this year. Because the vast majority of properties in the county saw reductions, that means that the tax base has significantly shrunk. In order to raise the same amount of money, tax rates are going to have to go up. This will show up in the 2020 bill released in the summer of 2021. The result is likely to be that some properties will see their taxes actually increase despite the reduction in assessed value and others will see taxes decrease by less than their reduced assessed value might lead them to expect.
Local government budget woes
In addition to the changes in assessed values, the response to the pandemic has devastated budgets across all levels of government. Unless Congress decides to provide significant funding to state and local budgets, the result in many cases is likely to be tax increases, sometimes substantial ones. Keep in mind that these tax increases won’t show up until the tax bills that are sent out in the summer of 2022 and will be on top of any increases seen in the summer of 2021 due to the COVID-19 adjustment to the 2020 taxes. In just one example, the Chicago City Council approved a property tax hike in November. Not only will Chicago taxes go up for the 2021 tax year (billed in 2022), but every year afterward, unless the City Council decides otherwise, they’ll increase at the rate of inflation. (For more information, see this Chicago Tribune article.)
Regularly scheduled reassessments
On top of all that, Cook County’s regular reassessment schedule continues. In 2020, the south & west suburbs (those south of North Avenue) were reassessed. The COVID-19 adjustment was applied to the new assessed value, so many of those properties will actually see an increase, but less of one than there would have been without the pandemic. In 2021, it’s Chicago’s turn for reassessment.
What does this all mean for my clients?
Expect more wrangling during attorney review about the tax proration. Standard 105%/110% prorations will probably be a rarity this year. The unprecedented nature of these changes means that it will be much more difficult to predict property taxes. You may hear from more buyers post-closing than usual if their tax bills don’t match the tax credit they received.
What should I do to minimize difficulty for my clients?
- For every Cook County transaction closing in 2021, list the tax proration percentage as TBD. 105%/110% probably isn’t going to cut it, and listing TBD makes both parties aware that taxes will need to be addressed during attorney review, instead of setting up false expectations that the issue is settled.
- Tell your clients not to over-rely on the 2019 taxes in estimating future taxes and to be prepared for unpleasant surprises. Nobody knows exactly what will happen, but taxes are likely to increase more than usual.
- Additionally, many attorneys will likely be trying to arrange escrow & reproration agreements instead of the usual credit at closing being the final word. Encourage your clients to see this as the best way to ensure that the buyer gets everything they’re due and the seller doesn’t overpay.
What about other counties?
Unlike Cook County, where there is one county-wide office responsible for assessing property, each township in other Illinois counties has its own assessor responsible for assessing properties in that township, making it much harder to provide generally-applicable information. Policies will vary township by township, but all of them will be dealing with the same pandemic-related pressures, so on balance taxes are probably likelier to increase than usual.