Buying or selling a home involves complex paperwork, with the tax proration agreement being a key document at closing. This agreement ensures property taxes are fairly split between buyer and seller based on their respective ownership periods during the tax year.
The process is typically managed by the title company, escrow agent, or closing attorney, who calculate the tax share each party owes. They use the property’s annual tax bill, divide it by 365 to find the daily tax rate, then multiply that rate by the number of days each party owned the property within the tax period.
For example, if the annual property tax is $3,650 and the sale closes on June 30, the daily rate is $10 ($3,650 ÷ 365). If the seller owned the property for 180 days, their share would be $1,800 (180 days × $10). The buyer receives this amount as a credit at closing, ensuring taxes are fairly allocated when the full tax bill is later paid.
Tax payment timing affects who receives credits at closing. Most U.S. jurisdictions pay property taxes “in arrears,” meaning the tax bill covers the prior ownership period and the buyer typically credits the seller. In some areas, taxes are paid “in advance,” meaning the seller has prepaid taxes for the upcoming period and the buyer reimburses the seller at closing.
Common misunderstandings include assuming the mortgage lender’s escrow account handles proration (it does not) and relying on last year’s tax bill even if assessments have changed. It’s crucial that the most accurate, current tax figures are used for proration.
Beyond property taxes, proration agreements also apply to splitting other expenses like Homeowners Association (HOA) dues or condominium fees, which are similarly divided according to ownership periods. Learn more about HOA fees and liens in our article on HOA and Condo Liens.
At closing, the prorated amounts are itemized on the Closing Disclosure form, a standardized document that details all buyer and seller costs; for additional details, see our guide on Closing Disclosure.
Understanding tax proration is essential for transparency and fairness in property transactions, helping both buyers and sellers know their true tax responsibilities when ownership changes.
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