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Proration

DEFINITION

Otherwise known as Tax Proration, this refers to the dividing or the allocation of monetary assets in a real estate property settlement. Typically, a lawyer, salesman, or mortgage broker takes care of the proration calculation process. This is to calculate the property taxes that the seller and the buyer is supposed to pay. This calculates how much the seller is going to pay from January 1st until the date of the sale closing. The buyer pays the amount from the closing date of the sale until December 31st and for every year as long as they own it.

EXPLANATION

The majority of real estate sales are simple to apply the calculated proration too. Proration is a statement in paperwork, and while it is usually straightforward, there are times when it is not. Property taxes have a tendency to change from fiscal year to fiscal year. These statements of settlement can be lengthy for this reason and also may include itemization. This is especially true of prorations that have large amounts affecting both the buying and the selling parties.

When Does Proration Become Necessary?

Proration is always necessary. Unless a home is sold on December 31st or the day after, January 1st then a prorated amount must be determined for the property taxes. Once you buy a residential property, the property taxes become your responsibility, and the proper amount must be calculated before the final closing of the house. As a seller, you only have to pay the property taxes that you owe for the period of that fiscal tax year that you owned the home. Proration is not just needed but typically wanted by both parties, so neither ends up paying for property taxes while they did not own the house.

The Steps Of Proration

Without looking into an example of Proration right now, here are the steps of Prorations. Number one, to calculate the tax proration, find the property tax rate based on the local area’s property tax rate. The seller is required to produce a tax bill copy at this point. By understanding how many days the property was in a specific tax year, you can accurately prorate your tax bill. After that, the number of those days is divided by the total number of days in a year. This will produce a percentage of days the seller owned the home during that year. Take that percentage and multiply the number with the property tax bill document. Then just subtract that amount you have on the property tax bill from the amount you got from multiplying. After these steps, you will have the prorated amount.

Can Eligible Tax Credits Be Used For The Prorated Amount?

Absolutely. All eligible tax credits you have can be applied to the prorated amount. There are also other tax credits your state or local government may have put in place for buying a home or selling a residential property. There may also be tax penalties for buying or selling homes. This is why it is essential to look into property tax laws and regulations before selling or buying a home. The bottom line? Do your research on everything related to buying a home or selling one. For more on property taxes see our information posted about them.

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