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 will be regarding 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.

Things You'll Need

  • Calculator
  • Calendar
  • Determine annual property taxes at the time of closing. 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.

  • Determine how many days the seller has owned the property. This should be an exact number of days. For example, January and February of 2010 have 59 days.

  • Divide the total annual property tax bill 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 3.1780.

  • Multiply the daily tax rate by the number of days the seller has owned the property. In this example, the seller has owned the property for 59 days, multiplied by 3.1780, which gives you $187.502. You can round the final figure down to two decimal points, or $187.50.

Tips & Warnings

  • You can find property tax information, such as the previous year’s tax bill, on your county’s property appraiser’s website.
  • The prorated amount from the calculation will be 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.
  • Before the closing, determine when your state sends out property tax bills. For example, all Florida bills are as of November 1, while in Illinois the counties decide when to bill for taxes.

References

  • “Florida Real Estate Sales Associate Course”, Gold Coast School of Real Estate, 2009
  • EscrowHelp.com
  • Photo Credit Creatas/Creatas/Getty Images
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