Tax proration is normally associated with dividing the financial responsibility between a buyer and a seller during a real estate sales transaction. As a first time home buyer, the HUD-1 settlement statement will reflect if the tax payment is a credit or debit to either the buyer or the seller. Prorations can also be used for rental incomes, prepaid expenses, or calculating your annual taxes and then prorating the figures into a monthly dollar amount.
Locate the amount of prepaid taxes or taxes due by the seller on your HUD-1 settlement statement. The closing date is generally a credit to the buyer during the real estate sales transaction.
Calculate the date that the tax payments were made. It is important to note if the tax year was paid for in full or if there is a scheduled tax payment yet to be made. For example, if the closing is scheduled for November 1st of this year and the tax year was paid in full July 1, 2009 through June 30, 2010, there would be a credit due to the seller from November 2 to June 30th of the following year.
Take the amount paid by the seller and prorate that figure by dividing it by either a 12-month or a 365-day calendar year.
For example, if the annual taxes paid were $15,000 and paid in full on July 1, 2009, by dividing it by 12-months, the monthly taxes are $1250.00. If the closing date was November 1, the seller would have a credit of approximately $10,000. $1250 multiplied by 8 months (November 1, 2009 through June 30, 2010) will equal $10,000.
Prorating Taxes: Home's Assessed Value
Contact your tax collector's office for your home's assessed value. You can also locate this information on your preliminary tax bill in the "Assessed Valuation Information" section. Take the land value amount and add it to your improvements amount for a total taxable assessed value. It is important to note that you need to know if this is the net taxable assessed value.
For example, the land value of $125,000 added to the improvements (home structure) of $175,000 will equal to a $300,000 taxable assessed value.
In order to find out what your net taxable assessed value is you will need to find out the assessment ratio being used for that tax year.
For example, if the taxable assessed value is $300,000 and the assessment ratio is 50 percent, multiply $300,000 by 50 percent, to equal $150,000 net taxable value.
Find out what your tax rate is. You can contact your tax collector's office or locate this information on your preliminary tax bill in the "Explanation Of Taxes" section. They generally consist of your county tax, district school tax and local municipal tax.
For example, if the county tax is 2 percent, the school tax is 5.5 percent and the municipal tax is 2.5 percent, add these figures together and it will give you a total tax rate of 10 percent.
It is important to note that each county calculates different types of regularly collected taxes and that in certain states the tax rate is sometimes referred to in mills.
Multiply your net taxable assessed value by your tax rate. This will compute your annual taxes.
For example, if the net taxable assessed value is $150,000 and your tax rate is 10 percent, your annual taxes are $15,000.
Prorate your annual taxes by dividing your annual taxes by the amount of tax payments you make per year. If your state requires quarterly taxes, divide your annual tax amount by 4.
For example, if your annual taxes are $15,000 divide by 4 payments which equals $3750 quarterly. You can prorate the same figure into a monthly budget by dividing $15,000 by 12 months to equal $1250 in monthly taxes.
- Questions and Answers To Help You Pass The Real Estate Exam; John Reilly & Paige Bovee Vitousek with Time Meline, Consulting Editor; 2008