When buying or selling real estate, understanding the financial nuances is key to a smooth transaction. One aspect that often requires careful consideration is the proration of property taxes. This ensures that both the seller and buyer fairly share the property tax responsibility based on their actual ownership period within the year of closing.

What are Property Tax Prorations?

Property tax prorations are adjustments made at closing to account for property taxes that the seller has already paid or will owe at or after the sale of the property. Since property taxes are typically paid in arrears (i.e., the bill for a given year is paid at the end of that year or at the beginning of the next year), prorating them ensures that each party pays only for the time they actually own the property.

How Do Property Tax Prorations Work?

The process of prorating property taxes involves calculating the daily tax rate and then determining how many days each party will be responsible for the taxes within the fiscal year. Here’s how it’s generally done:

  • Determine the Annual Property Tax Amount: This is usually based on the last available tax bill.
  • Calculate the Daily Tax Rate: Divide the annual property tax amount by 365 (366 for leap years).

Calculate Each Party’s Responsibility:

  • Seller’s Responsibility: From the beginning of the tax year to the day before closing.
  • Buyer’s Responsibility: From the closing date to the end of the tax year.

Let’s consider a practical example to illustrate. Suppose the annual property tax on a home is $3,650, and the closing is set for July 15. The seller owned the home from January 1 to July 14, and the buyer will own the home from July 15 to December 31.

  • Daily Tax Rate Calculation: $3,650 / 365 = $10 per day
  • Seller’s Responsibility: 195 days (January 1 to July 14) * $10 = $1,950
  • Buyer’s Responsibility: 170 days (July 15 to December 31) * $10 = $1,700

In this example, if the seller had not yet paid any taxes for the year at the time of closing, the seller would typically credit the buyer $1,950 at closing. This represents the amount of tax the seller would owe for the days they owned the home. Conversely, if the seller had already paid the full year’s taxes (or was paying them at closing), the buyer would need to reimburse the seller for the taxes from July 15 to December 31, totaling $1,700. Ultimately, either the buyer or seller will pay the bill in full but will be credited for the other party’s portion at closing.

Why Are Property Tax Prorations Important?

Property tax prorations are essential for a few reasons:

  • Fairness: They ensure that both buyer and seller only pay the property taxes for the period during which they own the property.
  • Financial Planning: Knowing the proration amounts can help both parties plan their finances better around the time of the property transaction.
  • Legal Compliance: Properly prorating and disclosing tax liabilities can prevent legal disputes between the parties involved.

Understanding property tax prorations helps both buyers and sellers recognize their financial obligations and avoid surprises at closing and after.

Harlan Florence is an Atlanta-based boutique law firm that believes there's a better way to handle your real estate closing. We'd love to work with you. Contact us today, and let's see what we can do together.
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