What Are Closing Costs
Closing costs are the fees and expenses paid at the completion of a real estate transaction. For property owners appealing tax assessments, closing costs matter because they directly influence the sale price used in comparable sales analysis, which assessors rely on to determine your property's assessed value.
Closing costs typically range from 2 to 5 percent of the purchase price and include title insurance, recording fees, attorney fees, loan origination fees, appraisal fees, and property taxes. The key point: assessors often strip out closing costs when analyzing comparable sales, using the net sale price (or adjusted sale price) to establish fair market value.
This matters in your appeal because if an assessor mishandles closing cost adjustments, the comparable sales analysis becomes skewed, potentially overstating your property's value and inflating your assessment.
Why Closing Costs Matter in Assessment Appeals
Assessors use the sales comparison approach to value properties. They identify recent sales of similar properties (comparables), then adjust for differences. Closing costs adjustments are standard here. If a comparable property sold for $500,000 but closing costs were $18,000, the adjusted sale price should reflect $482,000 in actual consideration.
Some assessors fail to make these adjustments correctly, inflating their assessment ratio (the relationship between assessed value and market value). In most states, assessment ratios must fall within a narrow band. In Illinois, for example, the standard ratio is 33.3 percent. If your assessment is based on inflated comparable sales, your assessment ratio may exceed the legal limit, giving you grounds for appeal at a board of review hearing.
Reviewing the closing statements of comparables cited in your assessment notice is a concrete way to challenge inflated valuations. Ask your assessor or request through FOIA for the settlement statements or closing documents used in their analysis.
Key Points About Closing Costs in Appeals
- Adjustment Requirements: Professional appraisers and assessors must deduct closing costs from sale prices when calculating adjusted sale price. Failure to do so overstates comparable value.
- Non-Realty Items: Some closing costs (like personal property transferred or business fixtures) should not reduce the real property sale price. Proper categorization is critical.
- Tax Proration: Property taxes are typically prorated at closing based on the exact closing date. This affects net proceeds but should not reduce the actual sale price used in comparables analysis. See Tax Proration for details.
- Transfer Tax: Some jurisdictions impose transfer taxes at closing. Like other closing costs, these reduce net proceeds but are adjusted out of the sale price when establishing market value. See Transfer Tax.
- Documentation Trail: Closing statements, HUD-1 forms (or Closing Disclosure documents), and settlement attorney statements all show itemized closing costs. These are your evidence in an appeal.
Common Questions
- Do all closing costs get subtracted from the sale price for assessment purposes? No. Only legitimate real property closing costs (title insurance, recording, property taxes, assessor fees, and similar items) are adjusted. Closing costs tied to the buyer's loan (origination fees, appraisal fees paid by the buyer) may or may not be adjusted depending on local practice. Review your jurisdiction's appraisal guidelines.
- Can I use closing costs from my own purchase to argue my assessment is too high? Only if your property appears as a comparable sale in another owner's assessment. If you're appealing your own assessment, your purchase price and closing costs establish the baseline, but the assessor's comparable sales analysis is what you need to challenge. Examine the comparables cited, not your own transaction.
- What if the assessor's closing cost adjustments differ from what I found in the settlement statement? This is a valid appeal point. Request the comparables analysis and settlement documents at your board of review hearing. If the adjustments are wrong, the assessment ratio becomes demonstrably incorrect, supporting your appeal for reduction.
Related Concepts
Tax Proration describes how property taxes are divided between buyer and seller at closing and affects the actual funds exchanged. Transfer Tax is a jurisdiction-imposed cost at closing that, like other closing costs, is adjusted out when calculating market value for assessment purposes.