A buyer will be purchasing an office building in downtown Dubuque, Iowa for $750,000. The banker who is financing the property wants the buyer to deposit 3 months of property taxes into an escrow account. If the taxes are based on 3% of the sale price, what is the dollar amount of taxes the buyer needs to deposit into the escrow account?

Rationale

$5,625

To determine the amount the buyer must deposit into the escrow account, we first calculate the annual property taxes based on 3% of the purchase price of $750,000, which totals $22,500. Dividing this by 4 gives us the quarterly tax payment of $5,625.

A ($5,600) YOUR ANSWER

This amount is slightly less than the correct calculation. It may result from an incorrect tax rate or a miscalculation of the quarterly payment. The annual taxes calculated at 3% of $750,000 yield a total of $22,500, which does not correspond to this figure.

B ($5,625) CORRECT

This is the correct answer. The annual property tax based on the 3% rate is $22,500. Dividing this figure by 4 for the quarterly escrow deposit results in $5,625, which is the correct amount needed.

C ($5,650) YOUR ANSWER

This amount is higher than the correct calculation. It likely represents an overestimation of the quarterly tax payment. The true quarterly amount, derived from the annual tax of $22,500, is confirmed to be $5,625.

D ($5,675) YOUR ANSWER

This figure also exceeds the correct amount. It may arise from an erroneous assumption about the property tax rate or an incorrect division of the annual taxes. The accurate quarterly deposit remains at $5,625.

Conclusion

The buyer needs to deposit $5,625 into the escrow account for property taxes based on a 3% rate of the $750,000 purchase price. This amount is derived from the annual tax calculation of $22,500, divided into quarterly payments. The other options either underestimate or overestimate the required tax deposit, confirming that careful calculations are essential in real estate transactions.

$5,625

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