Definition of Prorated Taxes

Definition of Prorated Taxes
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Taxes usually apply to a specific individual and cover the duration of a tax period, generally one year. However, government tax agencies or sellers may allow eligible individuals to save money by paying prorated property taxes instead.

Property tax applies to real estate that a taxpayer owns. The tax rate is usually based on the real property’s taxable value or assessed value. Tax proration involves dividing the full year's taxes by a portion of time, usually 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 or prorate the property tax bill for the portion of the tax year that they own (or will own) the property.

It's All in the Math

Property tax proration is the act of splitting a property tax bill, which usually covers taxes that are due for a calendar year or fiscal year. The tab is split over a period of time. Prorated taxes are a common feature of real estate closings because they ensure that the seller and buyer pay their appropriate share of the taxes at that time.

Prorating any payment, including taxes, involves dividing the full amount due by a portion of a period of time. A $100 tax bill that covers one year would have a prorated six-month value of $50 and a prorated eight-month value of $66.67. Prorated taxes can only occur when a taxpayer's liability reduces for some reason. The taxpayer will be responsible for paying the full amount in the following tax year.

How to Prorate a Property Tax Bill

State and local governments along with municipal districts impose property taxes 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. Governments will allow for prorated taxes because a resident may only own a piece of property for part of a year, either before selling it or after acquiring it.

You and the other party can decide to prorate the real estate taxes in any manner you choose when you buy or sell a home. Some states, such as Michigan/mileg.aspx?page=getobject&objectname=mcl-211-2), supply guidelines for prorated real estate property taxes using the closing date as a cutoff for determining liability.

The new owner will occupy the home when the next tax bill comes, and the previous owner paid the last property tax bill, so 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, the higher the tax liability is likely to be, making a prorated determination even more important.

An Example of a Prorated Tax Bill

Let’s say Buyer A purchases and closes on a piece of real estate, perhaps a home, on July 1. The county government bases property taxes on a calendar year: January 1 through December 31. Buyer A and Seller B would each pay half a year’s real estate taxes in this case if the tax bill for the current year of sale is prorated:

  • January 1 through June 30:‌ Seller B pays for these months because they owned the real property during this period.
  • July 1 through December 31:‌ Buyer A pays for these months because they owned the home during this period.

Seller B would be responsible for the tax payments for six months: January, February, March, April, May and June. Buyer A would pay six months’ taxes: July, August, September, October, November and December. Each would therefore pay $3,000 in property taxes if the taxes on the home were $6,000 a year: half the amount of property tax that would be due for the year.

But Seller B would pay only five and a half months’ real estate taxes ($2,750) if Buyer A closed on the sale on June 15 rather than July 1. Seller B would pay 11 months’ real estate taxes ($5,500) if closing took place on November 30 because they owned the property for 11 months in this case.

Both the seller and buyer pay the taxes applicable to the time period during which they owned the real estate. Governments will allow for prorated taxes. Each prorated share is typically placed in escrow at the time of closing, according to Napa County, California.

How to Prorate Personal Property Taxes

Municipal governments and agencies that levy property taxes on the value of personal property generally allow property owners to pay prorated taxes based on partial year ownership. For example, taxpayers in Loudon County, Virginia 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.