Understanding Real Estate Taxes and Tax Credits at Closing in Illinois
Real estate taxes in Illinois are notoriously complicated, especially for buyers and sellers navigating a transaction. Unlike many other states where taxes are paid in real-time, Illinois taxes are paid in arrears—meaning homeowners pay for the previous year’s taxes rather than the current year. This creates challenges at closing because the final tax bill for the year of sale is not yet available, requiring buyers and sellers to estimate taxes and negotiate a proration credit to ensure fair allocation.
How Illinois Property Taxes Are Calculated
Illinois property taxes are determined by three key factors:
- Assessed Value – The county assessor determines a property’s taxable value based on a percentage of its market value (10% for residential properties in Cook County).
- Equalization Factor (Multiplier) – The Illinois Department of Revenue adjusts assessed values to ensure consistency across the state.
- Tax Rate – Set by local governments, school districts, and taxing bodies, this determines the final bill.
Exemptions, such as the Homeowner Exemption, Senior Exemption, Senior Freeze, and Disabled Veteran Exemption, can significantly reduce a homeowner’s tax liability. While some of these automatically renew, others must be reapplied for annually. If an exemption is not renewed before the sale, the tax bill used for proration may be inaccurate—potentially leaving the buyer with an unexpected tax increase.
The Challenge of Estimating Taxes at Closing
Since taxes are paid in arrears, the most recent tax bill available at closing is for the previous year—not the current year. This creates a challenge because tax bills frequently increase, sometimes significantly.
In Cook County, where taxes are notoriously unpredictable due to delayed billing and reassessment cycles, buyers and sellers must estimate future taxes when negotiating credits. These issues directly result from mismanagement by Cook County officials, whose inefficiency, budget shortfalls, and reckless spending habits lead to constant tax hikes and administrative delays, forcing property owners to deal with the consequences.
To compensate for this uncertainty, tax prorations are used. A tax proration is a credit given to the buyer at closing, reimbursing them for the seller’s share of unpaid property taxes. This is necessary because the buyer will ultimately pay the full tax bill when it becomes due, even for the months the seller owned the property.
How Tax Prorations Are Calculated
In most transactions, tax prorations are based on the most recent tax bill available, usually using 105% of the previous year’s tax bill to account for expected increases. In some cases, particularly in reassessment years, buyers may request a higher proration percentage (such as 110%) if they anticipate a significant tax increase.
Alternatively, if a new assessed value is available, taxes can be estimated using the following formula:
Assessed Value×Equalization Factor×Tax Rate=Estimated Taxes
In this case, a 100% proration is typically used, since the calculation is based on projected taxes using a known assessed value rather than the previous year’s bill. assessed values tend to be the biggest driver of tax increases, Cook County has historically increased its equalization factor and tax rates over time. If there are signals of significant changes (e.g., reassessment cycles or municipal budget shortfalls), a higher proration (e.g., 105%) could still be justified.
When a Buyer Could Be Harmed by Exemptions
While prorations generally provide an accurate credit, buyers can be harmed if a seller’s exemption was not renewed before closing or if an exemption will not apply after the sale. The biggest risks come from the Senior Freeze and other exemptions that lower the assessed value.
For instance, the Senior Freeze Exemption locks in an assessed value and must be renewed annually. If the seller fails to reapply before selling, the new tax bill (which won’t be available until after closing) may reflect a much higher assessment. If prorations were based on the previous year’s discounted bill, the buyer could end up with an underestimation of their tax liability—leaving them responsible for a much larger payment when taxes become due.
Even if an exemption was properly renewed, buyers still need to consider that taxes will increase once the exemption expires. Exemptions are based on who owned the property as of January 1 of the tax year, so a seller’s exemption continues to apply for the full tax year in which they owned the property. However, once the buyer takes ownership, they will not benefit from that exemption unless they qualify.
Example: How a Buyer Could Be Harmed
- A seller has a Senior Freeze, which capped their assessed value at $40,000, resulting in a 2023 tax bill of $4,000.
- The actual assessed value without the Senior Freeze is $80,000, which would result in a $8,500 tax bill.
- The seller forgets to reapply for the Senior Freeze in 2024, meaning the 2024 tax bill (which the buyer will eventually pay) will be based on the full $80,000 assessment.
- The buyer closes in April 2024, and tax prorations at closing are based on the 2023 tax bill of $4,000—providing the buyer a credit of $4,200 (105% proration).
- When the 2024 tax bill is issued in late 2025, it jumps to $8,500 due to the expired Senior Freeze.
- The buyer now owes an extra $4,300 in taxes because the proration was based on an artificially low bill.
The proration was not inaccurate at the time of closing, but the buyer was shorted on credits because the seller’s final tax bill was artificially reduced by an exemption that was no longer in place.
How Buyers Can Protect Themselves
To avoid surprises, buyers should review the property’s tax history and confirm which exemptions applied to the last tax bill. If the seller had a Senior Freeze, Veterans Exemption, or other major reduction, the buyer should assume their future tax bills will be higher and negotiate a higher proration percentage (110%-120%) or request that prorations be based on the assessed value calculation rather than the last tax bill.
If there is any doubt about whether the seller renewed an exemption, the buyer should verify the renewal with the Cook County Assessor’s Office. If the seller failed to renew a non-automatic exemption before closing, prorations should be adjusted to reflect the full, non-exempted tax amount to ensure the buyer isn’t left paying the difference.
What Sellers Should Watch For
Sellers should be aware that buyers will scrutinize exemptions and may try to negotiate higher prorations if they believe the next tax bill will be higher than the last. While 105% is standard, some buyers will demand 110%-120% prorations if a major exemption won’t carry over.
Sellers should also avoid tax escrow holdbacks, which some buyers request as a safeguard against rising tax bills. These holdbacks create delays in the disbursement of funds and administrative disputes over when escrow should be released. Many title companies and law firms—including ours—charge additional fees for managing tax escrows, making it a costly and unnecessary option. A properly negotiated proration is far simpler and avoids the headache of an escrow dispute months or years later.
Final Thoughts
Understanding how exemptions impact tax prorations is key to avoiding surprises after closing. Buyers should check for exemptions that require renewal, anticipate increases when Senior Freezes or Veterans Exemptions are present, and negotiate higher prorations if necessary. Sellers should be aware that buyers may push for inflated prorations and should be firm in defending a fair estimate. By working with knowledgeable attorneys and title professionals, both buyers and sellers can avoid tax surprises and ensure a smooth closing process.