Understanding Prorations

When you sell or purchase a home, you might hear the term “prorations” being used.  This is because some items may be prorated at the time of closing.  Since you might be hearing this term at the time of closing, it is a good idea to gain a better understanding of what it means.

What Does the Term “Prorations” Mean?

When you close on a home, certain items may be prorated.  This means certain items of monetary value may be divided between the seller and the buyer.  These most typically include items such as:

• Interest
• Insurance premiums
• Property taxes
• Rental Income

These items are not necessarily split equally.  Rather, a specific proportion is determined and these costs are shared in accordance with the proportion.  Typically, the proportion is created based on the date of use or the time of use. 

What Is Most Typically Prorated?

In most home transactions, the ad valorem taxes for that year are prorated.  This is because these taxes are paid at the end of the year and may be paid as soon as October 1^st or as late as January 31^st of the next year.  Therefore, if the closing takes place before October 1^st, the seller will usually have a charge from January 1^st until the date of the closing.  Similarly, the buyer will receive a credit for this period of time.

It is possible for the buyer and the seller to negotiate the proration of these taxes.  Most buyers and sellers go along with this standard format because it ensures the seller pays taxes for the time period in which he or she still had possession of the home.  

When determining the proration for taxes, the title company generally uses information from the previous year.  If the closing occurs after October 1^st and when the data for that year is released, however, the title company will usually charge the buyer and the seller their prorated amounts and will then pay the taxes directly.

Will I Have To Pay The Full Tax Year?

When you receive a bill around October 1^st, you will find that you are expected to pay for the full year prior to this date.  Although you did not live in the home at this time, the previous owner provided you with a credit in the amount of the taxes for the time he or she owned the property.  Therefore, you are essentially credited when you purchase the home so you can pay the taxes later.