Under the circumstances described in the reader’s question, the buyer may want to opt out of the allocation provision, since he is not a resident of the county that assessed the tax. On the other hand, the seller may require the allocation, since he will not be the owner of the boat for a part of the year for which the tax has been assessed. A well-drafted purchase contract will include a provision that allows the buyer to ’opt out’ of the allocation, and the final outcome will depend on the negotiations between the parties.
When the parties agree to allocate the property tax assessment between them, the most logical basis for the allocation is to divide the calendar year based upon the closing date of the transaction. Under this method, the percentage of the calendar year that the boat was owned by each party is calculated, and that percentage is applied to the tax assessment for that year. The buyer will then be required to pay that amount to the seller at the closing of the transaction.
There is some confusion over the proper tax year to use for the allocation of property tax. A boat owner’s annual tax bill indicates the fiscal year covered by the bill, which typically spans from July 1 of the current year through June 30 of the following year. However, the legal obligation to pay the tax to the county is assigned to the person who owned the boat on the ’assessment date,’ which in California is always Jan. 1. Since the person who owns the boat on Jan. 1 is responsible to the county for the entire year’s property tax payment, the allocation of the tax between buyer and seller should be based upon a calendar year proration.
Finally, if the buyer and seller agree to pro-rate property taxes for the year of the purchase, the purchase contract should spell out the exact amount of the property tax allocation between the parties. This practice will help to avoid confusion when the funds are distributed at closing. And, if the purchase is made through a California broker, the broker is required under California law to specify the applicable tax year in the purchase agreement, as well as the actual prorated amounts payable by the seller and buyer.