How to Compute Prorated Property Taxes

Proration ensures that buyers and sellers pay their fair shares of property tax.

Proration ensures that buyers and sellers pay their fair shares of property tax.

Property tax proration usually refers to dividing taxes between a property buyer and a seller in a year where the property changes hands. The concept is simple, and usually based on how many days each party owned the property during the tax year, but the actual process can get a little complicated depending on how tax years run. You may want to have a lawyer verify the actual computation or use an online proration calculator for free.

Tip

Compute prorated taxes when buying and selling property by determining how long the buyer and seller each owned the property in the tax year. Adjust the final sale price accordingly.

Understanding Property Tax Proration

The concept of property tax proration is relatively simple: When you sell a house or another piece of real estate, you don't want to pay for property tax for time in which you didn't actually own the property. And when you buy real estate, you don't want to pay property tax for the time before you owned the land.

The solution is to prorate property tax, or allocate the tax appropriately between the buyer and the seller. Since property tax is often paid in advance, this will often require a payment from the buyer to the seller based on the total number of days in the tax year that each party owns the property.

In other jurisdictions, such as with Illinois real estate taxes paid in arrears, property taxes are paid after the fact. The seller will have to pay the buyer so that the buyer can pay the taxes for the period the seller owned the house when the tax bill comes due.

Things to Keep in Mind

Keep in mind that many taxing jurisdictions use a different tax year than the calendar year. For example, a city might use a fiscal year that runs from July 1 of one year to June 30 of the next. This is different from your personal income tax, for instance, which works based on the calendar year. Make sure to compute the percentage of the fiscal year, not the calendar year, each party owns the property.

Also make sure that you are using the appropriate tax rate for the period, and that you're taking into account any changes in assessed value or any other tax changes that take place in the relevant period. It's often a good idea to have a real estate lawyer, or one for each side of the transaction, draft and review the proration agreement that's part of your sale transaction.

You can also use an online prorated tax calculator tool specific to the area of the property to at least approximate the amount of tax payable by each party.

Other Fees to Prorate

When you buy and sell real estate, you may want to prorate fees besides property tax. For example, if the property is part of a homeowner's association or a condominium, you will likely pay condo fees, maintenance fees, dues or something similar.

You can prorate these along the same lines as property taxes. Determine what period the dues have been paid for, or will be paid for, and ensure that each party to the transaction pays their appropriate share. Depending on how dues are charged, this could mean a payment from the buyer to seller or vice versa.

Dealing With Back Taxes

If there are back taxes or other fees, meaning payments that are overdue, on the property the buyer and seller will need to decide how to deal with them. Typically, the seller will pay any back taxes out of the price paid by the buyer without it affecting the net amount paid by the buyer. It's important to make sure there are no unexpected past tax bills associated with the property when you take possession as a buyer.

Tip

  • 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.

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About the Author

Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.

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