How to Prorate Real Estate Taxes

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A real estate closing can be very complicated, especially when it comes to determining who owes what. One of those determinations is real estate property taxes, which are usually prorated on the day of closing. That is, the seller pays what would be owed for his or her portion of ownership and the buyer does the same. If you use a set formula, you’ll be able to calculate the prorated taxes yourself, even before you go to the closing table.

Find Last Year's Tax Bill

Since property taxes are paid in arrears, or for the current year toward the end of the year, you’ll probably use the last year’s tax bill. You can find property tax information, such as the previous year’s tax bill, on your county’s property appraiser’s website. You can also go to the county tax assessor's office, which is often at the courthouse, to get this tax information.

Calculate the Daily Tax Rate

When you find the property tax total for the previous year, divide that amount by 365. This calculation will give you a daily tax rate. Round the daily tax figure down to the third or fourth decimal to start with. For example, an annual tax bill of $1160, divided by 365, will give you a daily rate of $3.178082192, which you can round to $3.178.

Determine the Seller's Tax Liability

Figure how many days the seller has owned the property. This should be an exact number of days. For example, the seller owned the property in January and February of 2019, which have a total of 59 days.

Multiply the daily tax rate by the number of days the seller has owned the property. In the above example, the seller has owned the property for 59 days. When you multiple this number by $3.1780, you'll calculate the seller's tax liability, which is $187.502. You can round the final figure down to two decimal points, or $187.50.

Variations in Tax Due Dates

Before the closing, determine when the property taxes are due in your municipality so that you can accurately calculate the prorated tax liabilities. In some counties, property tax is due annually in January, and in other counties, the tax may be due in March. But in other counties, property tax may be due twice during the year. And in other states, such as Illinois, tax due dates are staggered by county or by population.

Your Settlement Statement

The prorated amount from your calculation will appear as a debit to the seller and a credit to the buyer on the settlement statement. If the seller has already paid taxes before the closing takes place, the tax proration will appear as a credit to the seller and a debit to the buyer.

References

About the Author

Chris Amisano began writing professionally in 2005, and his freelance work has appeared in "PennyCents Magazine," "The ACUTA Journal" and "Career Focus Magazine." Amisano holds an Associate of Science in aviation management from Everglades University and a Bachelor of Arts in Spanish from the University of Memphis. He is pursuing his Master of Business Administration with a concentration in human resources management at Bellevue University.

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