In most cases, taxes apply to a specific individual and cover the duration of a tax period, generally one year. However, in the case of property tax, which only applies to real estate that a taxpayer owns, government tax agencies or sellers may allow eligible individuals to save money by paying prorated taxes. Proration is the act of dividing the full year's taxes by a portion of time, for example, by the number of days in which the homeowner actually owns the property. It's common in real estate closings where the buyer and seller split (prorate) the property tax bill for the portion of the tax year they owned, or will own, the property.
Proration is the act of splitting a property tax bill, which usually covers the taxes that are due for a year, by a period of time. Prorated taxes are a common feature of real estate closings to ensure the seller and buyer pay their share of the taxes at closing.
Creating a Definition
Prorating any payment, including taxes, involves dividing the full amount due by a portion of a period of time. For example, a $100 tax bill that covers one year would have a prorated six month value of $50 and a prorated 8 month value of $66.67. Prorated taxes can only occur when a taxpayer's liability reduces for some reason; in the following tax year, the taxpayer will be responsible for paying the full amount.
Property Tax Basics
State and local governments, along with municipal districts, impose property tax on residents based on the value of their property. Different municipalities impose property tax differently; some only levy property tax on real estate, while others impose property taxes on vehicles and other forms of personal property. Because a resident may only own a piece of property for part of a year, either before selling it or after acquiring it, governments will allow for prorated taxes.
Real Estate Taxes
One area where you can prorate your taxes is in real estate. If you buy or sell a home, you and the other party can decide to prorate the taxes in any manner you choose. Some states, such as Michigan, supply guidelines for prorated real estate property taxes, using the closing date as a cutoff for determining liability.
Since the new owner will occupy the home when the next tax bill comes, and the previous owner paid the last property tax bill, either party can pay a prorated amount based on the date of the tax bills and the date of the sale. The higher a real estate sale's price is, the higher the tax liability is likely to be, making a prorated determination even more important.
Personal Property Taxes
When municipal governments and agencies charge levy property taxes on the value of personal property, they generally allow property owners to pay prorated taxes based on partial year ownership. For example, in Loudon County, Virginia, taxpayers are only responsible for prorated tax based on the number of months the property they own was within the county's borders. States and counties may exempt certain personal property, such as airplanes and mobile homes, from proration.