Why Prorate?

• Prorating an expense like property tax ensures that buyer and seller each pays a fair share. A fair share is the amount of money that applies to the amount of time the buyer owned the home during the year of the closing. For a July 1 closing, for example, each side will have owned the home for half the year, so each will pay half the cost of pro-rated items.
  
  

Types of Taxes Prorated

• The most common types of property tax charges that are often prorated at closing include benefit fees for fire service, school taxes, which in some districts makes up the lion's share of taxes due, and property taxes the county or municipality levy.
  
  

Millage and Total Tax

• The property-tax amount is based on a tax assessment to which the taxing jurisdiction's millage rates apply. A mill is 1/1000th of the assessed value. For a home assessed at $20,000 in a jurisdiction with a 100-millage rate, the first step in figuring the tax is to multiply the millage by the assessment. That would be 100 x 20, as one mill is 1/1000 of the assessed value and there are 20 "one-thousands" in the assessment. The product is 2,000. The tax, then, is $2,000.
  
  

Prorating the Tax

• Prorating the tax requires escrow to determine how many days during the tax year each party will own the home. For the sake of simplicity, real estate calculations use a 360-day year divided into 12 30-day months. For instance, if the taxing jurisdiction follows the calendar year, and a sale closes on April 1, the seller will have owned the home for 90 days of the year -- the first three 30-day months. The buyer, then will own the home for 270 days -- the remaining nine 30-day months. The next step is to divide the total tax of $2,000 by 360 days to see how much the per-day tax is. The amount, rounded off to the nearest cent, is $5.56. Multiply the seller's 90 days by $5.56 to arrive at a $500.40 prorated property tax liability for the seller. Multiply the buyer's 270 days by $5.56 to arrive at a $1,501.20 prorated property tax liability for the buyer.
  
  

Pre-paid Tax

• Oftentimes, the seller will have paid the year's property tax before the closing date. In this case, the HUD-1 closing statement would show a $1,501.20 -- or $1,500, if rounded down -- charge to the buyer and a $1,500 credit to the seller as reimbursement for the buyer's share of the tax.