Home buyers and sellers both have tax bills to pay on closing day. The first is for transfer tax, which the buyer and seller typically split equally. Each party also must pay property tax for the portion of the year they owned, or will own, the home. The process for figuring out how much property tax each owes is called proration. The full amount of the tax is prorated for the buyer and seller so that each pays a proportionate -- rather than equal -- amount. Although the idea of proration is often confusing, the calculation is actually quite simple. Note that math computations for real estate transactions use 30-day months and 360-day years.
Divide the full year's property tax amount by 360 to find the daily tax amount. For example, if the annual tax amount is $3,600, divide $3,600 by 360 to arrive at a daily tax amount of $10.
Find the number of days of tax the seller is responsible for by multiplying the number of full calendar months the seller will have owned the home by 30 days, then adding the number of days in the partial month. Do not include closing day. For example, if the closing is on June 20, multiply five months -- January, February, March, April and May -- by 30 to arrive at 150 days. Add 19 days for the partial month of June. The seller is responsible for paying 169 days' worth of tax.
Multiply the daily tax amount by the number of days the seller is responsible for paying. A seller who owns the home for 169 days at $10 per day is responsible for $1,690 of the yearly tax. This is the seller's prorated property tax.
Find the number of days' tax the buyer is responsible for by multiplying the number of full calendar months the buyer will own the home by 30, then adding the number of days in the partial month. Include the closing day. Assuming a June 20 closing, the buyer will own the home for 11 days in the partial month of June plus six full months -- 180 days -- for a total of 191 days.
Multiply the daily tax amount by the number of days the buyer is responsible for paying. The buyer who owns the home for 191 days pays $1,910. This is the buyer's prorated property tax.
Check the math by adding the buyer's and seller's tax amounts. They should equal the total yearly tax. Using the same example, the seller's $1,690 tax plus the buyer's $1,910 tax equals $3,600.
- If the seller has already paid the year's property tax, he'll receive a credit for the amount the buyer is responsible for paying. This credit is added to his proceeds from the sale. If the seller hasn't yet paid property tax, the amount he owes is deducted from his sale proceeds. The buyer's tax is included in her closing costs.
- Jupiterimages/liquidlibrary/Getty Images
- What Does Prorate Mean in Real Estate Terms?
- What Do You Have to Do to Pay off a Tax Certificate on a Home?
- How to Estimate Taxes on a Mortgage
- If the Seller Pays Closing Costs, Are These Tax-Deductible?
- Can I Use HUD-1 for Deductions?
- How to Buy a Property at a Tax Sale
- What Is a Gap Mortgage?
- Explanation of a Wrap-Around Mortgage