How to Calculate Prorated Property Taxes

Prorated property taxes represent the division of property tax costs between the buyer and seller. This process ensures that each party is financially responsible only for the period they legally own the property within a given tax year. The proration is handled by a closing agent or attorney to guarantee fairness and accuracy in the final settlement.

Determining Responsibility for Payment

The division of property tax responsibility hinges on the closing date, which acts as the line separating the seller’s ownership period from the buyer’s. The seller is held responsible for the property taxes from the first day of the tax period up to, but not including, the day of closing. Consequently, the buyer’s responsibility begins on the day of closing and extends through the final day of the tax period.

This allocation ensures a clean financial break between the two parties. The seller covers the tax liability for every day they owned the home, while the buyer picks up the obligation from the moment the property legally becomes theirs. The closing agent is tasked with calculating these precise obligations, determining the exact number of ownership days for each party.

Information Needed for Proration Calculation

To accurately calculate prorated property taxes, several pieces of information must be gathered. The primary item is the total annual property tax bill for the residence, which can be found on the most recent tax statement from the local tax assessor’s office. If the current bill is not yet available, a common practice is to estimate the amount by using the previous year’s tax bill, often increased by a percentage like 110%, to account for potential tax hikes. Other necessary information includes:

• The property’s specific tax period, which may be a calendar year (January 1 to December 31) or a fiscal year, such as July 1 to June 30.
• The closing date of the real estate transaction, as this date determines the precise split in ownership days.
• The tax payment schedule, specifically whether taxes are paid in arrears or in advance.

Paying in arrears means the tax bill covers a period that has already passed; for instance, a bill received in 2025 covers the 2024 tax year. Conversely, paying in advance means the bill is for a future period of ownership. This distinction directly impacts whether the seller will owe the buyer a credit or vice versa at closing.

How to Calculate Prorated Taxes

The calculation of prorated taxes begins with determining the daily tax rate. This is accomplished by dividing the total annual property tax amount by 365 days (or 366 in a leap year) to find the per diem cost. The next step is to calculate the number of days the seller is responsible for. This period runs from the start of the tax year to the day just before the closing. Once the number of seller-responsible days is established, that figure is multiplied by the daily tax rate to find the seller’s total tax share.

Consider a scenario where taxes are paid in arrears. Assume the annual tax is $3,650, and the closing is on June 30th in a non-leap year. The daily tax rate is $10 ($3,650 / 365 days). The seller owned the property for 180 days (January 1 to June 29). The seller’s share is $1,800 (180 days x $10/day). Since the tax for the current year has not yet been paid, the seller gives the buyer a $1,800 credit at closing.

Now, examine a case where taxes are paid in advance. Using the same $3,650 annual tax and June 30 closing date, assume the seller has already paid the full year’s taxes on January 1. The buyer is responsible for the taxes from June 30 to December 31, which is 185 days. The buyer’s share is $1,850 (185 days x $10/day). In this situation, the buyer must credit the seller $1,850 at closing to reimburse them for the portion of the year the buyer will own the home.

Proration on the Closing Statement

The final prorated tax amount is formally documented on the Closing Disclosure (CD), a standardized form used in real estate transactions that details all costs and credits for both the buyer and seller. The property tax proration will appear as both a “debit,” which is a charge, and a “credit,” which is a payment received.

If taxes are paid in arrears, the seller’s share is listed as a debit to the seller and an equal credit to the buyer. This is because the seller is giving the buyer the money to cover their portion of the tax bill when it eventually becomes due.

Conversely, if the seller has already paid the taxes for the entire year in advance, the proration will appear as a debit to the buyer and a credit to the seller. This transaction reimburses the seller for the tax days they paid for but will not own the property. Carefully reviewing these line items on the CD ensures the calculations have been handled correctly.