Prebates & Property Tax Credits: Here's Everything You Need To Know!

What are they and how do they work?

A Property Tax Adjustment or credit, often referred to in the real estate world as a prebate, is a credit the State of Vermont offers to qualified homeowners, which reduces the annual property tax amount due on a person’s primary residence. There are various eligibility requirements one must meet in order to qualify for this credit, including a maximum household income. Vermont residents who own and occupy a property as their primary residence on April 1st must file a Homestead Declaration, Form HS-122, by April 15th of each year in order for their property taxes to be assessed at the Homestead rate and to qualify for the tax credit. If a homeowner receives a credit, they are notified by the State and the credit appears on their property tax bill which is released sometime after July 1 of each year.

Whoever owns the home on April 1st of each year is the owner of the property, for tax purposes, until April 1st of the following year. 

How does it get handled at closing?

Typically, when a person who receives a prebate sells their house, the prebate is prorated at closing so that the new owner of the property pays the full amount of property taxes due and does not receive the benefit of the prior owner’s tax credit. This means the buyer brings an additional amount of money to closing to reimburse the seller in the amount of their credit. This can be confusing for buyers because they often feel like they are giving the seller additional money, however it is important to remember that the amount of the property tax bill was only reduced because the seller met certain income requirements, so the seller is not receiving any extra money but instead is benefitting fully from the credit that they qualified for. It can be negotiated into the contract that the buyer would instead benefit from the seller's property tax credit - sometimes if the prebate amount is small or the seller is moving out of state or into a rental they may be happy to do this.

Closings Between April and July?

There is roughly a three-month window of time between April 1 and when the new property tax bills are released. During this time, it can be a bit tricky since we do not know the amount of tax credit the seller will receive. The amounts change from year to year based on income and other factors, so during this time real estate attorneys must estimate the tax credit a qualifying homeowner expects to receive on the upcoming tax bill. Buyers will need to have additional money available at closing for this and it's important for the Buyer's Agent to talk with them about what this could look like and do the added due diligence of asking the Listing Agent if anything has changed with the seller's financial situation or if they expect their tax credit amount to change for the year. The earlier that this amount can be disclosed to the other side, the less likely that there will be any issues due to a surprise prebate amount. Based on the amount the attorney estimates, the prorated tax credit amount is collected from the purchasers and it gets held in escrow until the tax bills are released and the closing attorney can confirm the tax credit amount, at which time the money is released to the seller. 

To estimate your Property Tax Credit Adjustment for 2023, visit https://tax.vermont.gov/document/2024-property-tax-credit-calculator.

For more information on Property Tax Adjustments, visit https://tax.vermont.gov/property/tax-credit.

If you have any other questions about prebates or anything else, reach out!