Mar 9, 2020

How Prorations for Real Estate work

At closing, some items, like real estate taxes, are divided up between the buyers and sellers so that each party pays their share of the expenses. This is called proration. The amount each party pays is based on the number of days in the year (or month) that they own the property. It is only fair that you are charged ownership fees and taxes just for the time you own the property.

The title agency is typically responsible for dividing these kinds of expenses proportionally based on a unit of time. For annual property taxes, we divide the tax amount by 365 days to obtain the cost per day. We then multiply the cost per day by the days the seller owned the home and the days the buyer will own the home. Each party is responsible for their prorated amount.

If the taxes for that year have not been paid, the seller is charged for their share and it is credited to the buyer to pay the total bill. If the seller has already paid the taxes for that year, the buyer is charged for their share and it is credited to the seller at closing.

Of course, property taxes aren’t the only fees that are prorated …

Monthly expenses, like HOA dues, are based on that HOA’s billing cycle. For example, let’s use a closing on Feb. 20 for a property that has monthly HOA dues of $280. This would represent dues of $10 a day. The buyer would be charged $80 for the 10 days they will own the property (February 21-28) and the dues are paid to the HOA on their behalf for those 10 days. That amount is added to what they will pay at closing.

In this scenario, if the seller had paid their February HOA dues, they would receive a credit of $80 at closing for February 21st through February 28th. This would be a credit for the expense they paid for a time they no longer own the property. If the seller had not paid their dues, they would be charged $200 for their share of the February dues (plus any late fees) and the title company would pay the HOA the February dues on their behalf.

Some prorations can be based on actual amounts – like rents and HOA dues. However, tax prorations are often based on estimates because the actual tax statement for that year has not been determined. The amount being prorated will typically be based on the previous year tax statement. The title company will usually require both buyers and sellers to acknowledge that if the actual tax bill comes out differently, they will settle it between themselves.

Prorations are addressed in Paragraph 13 of the TREC residential contract. It states:

“Taxes for the current year, interest, maintenance fees, assessments, dues and rents will be prorated through the Closing Date. The tax proration may be calculated taking into consideration any change in exemptions that will affect the current year’s taxes. If taxes for the current year vary from the amount prorated at closing, the parties shall adjust the prorations when tax statements for the current year are available. If taxes are not paid at or prior to closing, Buyer shall pay taxes for the current year.”

If, as a buyer or seller, you have any questions about your fair share of monthly, quarterly, or yearly expenses, just ask your title agent for the details.
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