How to do your own Real Estate Closing - Real Estate Tax Proration

When you purchase real estate, you are entitled to receive a real estate tax credit. This is because most real estate taxes are paid in arrears, i.e. this year's tax bill is for the previous year. Determining what amount you are entitled to at closing could be tricky and can depend when the date of your closing and up to when the last tax bill was paid. Usually, real estate tax bills are paid in two installments.

Difficulty: Moderate

Instructions

1. First you need to determine the last full year tax bill.
   
   If you are closing before the first tax bill of the year is paid, then you are entitled to receive a full year tax credit for the previous year's taxes. In addition, many contracts allow an additional 5% to 10% extra. Look at your contract and determine from the tax proration paragraph what percentage tax credit you should receive. If the amount states 105%, then multiply the last full year tax bill by 105% to determine the tax credit. This is the real estate tax credit for the previous year-payable in this year.
   
   That's not all. You are also entitled to a tax credit for the current year. Here is the formula to use:
   
   last full year tax bill/365 days x the number of days in the current year x 105%
   = the real estate tax credit for the current year.
   
   For example: if the last full year tax is $4,500 and you are closing on Feb 1 of the current year, and your tax proration credit is at 105%, then your credits are as follows:
   
   For last year: $4,500 x 105% = $4,725
   
   For the current year: $4,500/365 days x 32 (Feb 1 is the 32nd day of the year) x 105% =$437.26

2. If you are closing between the first real estate tax bill and the second real estate tax bill, then the formula is as follows:
   
   (last full year tax bill/365 days x 105%) - the amount of the first real estate tax bill paid = the real estate tax credit for the previous year.
   
   Again, that's not all-you are entitled to a real estate tax credit for this year. Use the same formula as above:
   
   last full year tax bill/365 days x the number of days in the current year x 105%
   = the real estate tax credit for the current year.
   
   We are assuming that your real estate tax credit is 105%--this could be more or less. Look at your contract to determine this percentage amount. If the contract does not mention the percentage then it is 100%.

3. If you are closing after the 2nd real estate tax bill has been paid, then you are not entitled to a real estate tax credit for the previous year as the real estate taxes have been paid. You are however, entitled to a real estate tax credit for the current year. Use the same formula as above:
   
   last full year tax bill/365 days x the number of days in the current year x 105%
   = the real estate tax credit for the current year.
   
   Again, we are assuming that your real estate tax credit is 105%--this could be more or less. Look at your contract to determine this percentage amount. If the contract does not mention the percentage then it is 100%.

Tips & Warnings

• You can determine what the last real estate tax bill was for the real estate that you are purchasing form the title commitment report or you can obtain it from the Treasurer's office in the county where the real estate is located.
• Remember, depending on the time you close, you are entitled to a real estate tax credit for the previous year and the current year.