If you’ve ever sat at a closing table and wondered why you were getting a credit, or paying one, related to property taxes, this is the post that explains it.
The answer to whether real estate taxes are paid in advance or arrears depends on where you live. And in Michigan, the answer has a few extra layers worth understanding.
Let’s start with the basics.
Paying in arrears means you’re paying for a period that has already passed. Think of it like a utility bill. You use the electricity first, then you get the bill. Most states handle property taxes this way. You live in the home during the year, and then you pay the taxes for that period after the fact.
Paying in advance means you’re paying for a period that hasn’t happened yet. Like prepaying rent. You cover the upcoming month before you live in it.
For most of the country, property taxes are paid in arrears. You’re essentially always paying for time you’ve already owned the property.
Michigan is a little different, and it’s one of the things that genuinely confuses people: buyers, sellers, and sometimes even first-time agents.
In Michigan, homeowners receive two separate tax bills every year. The summer bill arrives around July 1 and is due by September 14. The winter bill arrives around December 1 and is due by February 14. The summer bill covers school operating taxes and some local levies. The winter bill covers county, township, and the remaining local taxes.
Whether those bills are considered “in advance” or “in arrears” has historically varied by location. In urban and metro areas across Michigan, it’s been customary to treat taxes as paid in advance. In rural areas, it’s been customary to treat them as paid in arrears. And in some parts of the state, the two bills were treated differently from each other.
Under Michigan’s default legal rule, taxes are prorated at closing as though paid in advance, meaning the seller is credited for taxes they’ve already paid that cover a future period, and the buyer picks up taxes from the closing date forward.
Why does any of this matter? Because it directly affects your closing costs.
When you buy or sell a home, property taxes get prorated based on who owned the property and for how long during the tax period. If the seller has already paid taxes that cover a period after closing, the buyer reimburses them at the table. If the seller hasn’t yet paid taxes for the time they owned the property, they credit the buyer instead.
The method used, advance or arrears, changes who owes whom and by how much. On a $300,000 home with $6,000 in annual taxes, the difference in proration methods could mean a swing of several thousand dollars in either direction at closing.
This is one of those things that feels complicated until someone walks you through it once. After that, it makes complete sense.
If you’re preparing to buy or sell in Southeast Michigan and want to understand exactly how your tax proration will work at closing, that’s a conversation worth having before you get to the table, not during it.
I’m happy to walk through it with you whenever you’re ready.
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