How is property tax proration calculated at closing?

How is property tax proration calculated at closing?

• A. Based on the entire year's tax bill paid by the seller.
• B. Based on the buyer's estimated property tax liability for next year.
• C. Allocation of prepaid expenses between buyer and seller based on closing date and terms.
• D. The seller's tax basis and depreciation recapture.

Answer: (C)

Property tax proration at closing means dividing the current year's tax bill between the buyer and seller based on how many days each will own the property during that year, using a daily tax rate. The calculation uses the closing date and the contract terms to allocate the tax bill fairly. Think of it this way: take the annual tax amount, divide by 365 (or 366 in a leap year) to get a daily rate, then multiply by the number of days each party owns the home. For example, if the yearly tax is $3,600 and the closing date is mid-year (June 30), the seller owns January 1 through June 30 (181 days) and the buyer will own July 1 through December 31 (184 days). Daily rate ≈ $3,600/365 ≈ $9.86. Seller’s share ≈ 181 × 9.86 ≈ $1,787; buyer’s share ≈ 184 × 9.86 ≈ $1,813. In the settlement statement, these amounts appear as a credit to the party who has already prepaid or owes for their portion, with the exact direction depending on who is responsible for taxes at closing.

Property tax proration at closing means dividing the current year's tax bill between the buyer and seller based on how many days each will own the property during that year, using a daily tax rate. The calculation uses the closing date and the contract terms to allocate the tax bill fairly.

Think of it this way: take the annual tax amount, divide by 365 (or 366 in a leap year) to get a daily rate, then multiply by the number of days each party owns the home. For example, if the yearly tax is $3,600 and the closing date is mid-year (June 30), the seller owns January 1 through June 30 (181 days) and the buyer will own July 1 through December 31 (184 days). Daily rate ≈ $3,600/365 ≈ $9.86. Seller’s share ≈ 181 × 9.86 ≈ $1,787; buyer’s share ≈ 184 × 9.86 ≈ $1,813. In the settlement statement, these amounts appear as a credit to the party who has already prepaid or owes for their portion, with the exact direction depending on who is responsible for taxes at closing.