Property Taxes on Other Real Estate Owned

8/4/2011

By Robert L. Hamby, CPA

Banks should accrue for property taxes applicable to real estate acquired through the foreclosure process. After the foreclosure process ends and the real estate becomes Other Real Estate Owned (OREO) on the bank’s books, property taxes should be expensed unless it meets the exception test. Often times, during the foreclosure process, the real estate taxes on the property are in a delinquent status, so the question becomes whether the property taxes should be expensed as part of the foreclosure process or charged off through the allowance for loan loss account.

Prior to the loan going to foreclosure, management should evaluate the loan for possible impairment. During the evaluation for impairment process, management should consider the property taxes as part of their analysis. If consideration is given to property taxes during the impairment process, then any delinquent property taxes paid during the foreclosure process in order to avoid lien attachment should be charged off through the allowance for loan loss account. If no consideration is given to property taxes during the impairment evaluation process prior to foreclosure, the delinquent property taxes should be expensed. The exception to this rule is if the property in question is under construction. Property taxes incurred during the construction period can be capitalized to the extent that the Bank’s investment in the foreclosed property is less than the fair value less selling costs.

Management should also consider the implications of the charge offs in comparison to the level of the allowance for loan loss account for which additional provisions may be warranted in order to maintain an adequate balance. Also, under the current methodology for calculating an adequate allowance for loan loss amount, management is required to calculate the historical charge off percentage under ASC 450-20 which includes all charge offs generally segregated by loan type.