Tax Proration: Definition, How It Works, and Example
- Lukas Müller, PhD
- 1 day ago
- 3 min read
Tax proration is the process of fairly dividing property taxes between the buyer and seller in a real estate transaction, based on the portion of the year each party owns the property. Since property taxes are often paid annually or semiannually and in arrears (after the fact), proration ensures that each party pays only their share of taxes for the time they occupied the home.
The proration is calculated during the closing process and is itemized on the settlement statement. It ensures that taxes are not overpaid or unfairly burden one party over the other.
How Tax Proration Works
At closing, the escrow or title company calculates how much of the annual property tax bill is owed by the seller up to the closing date, and how much is owed by the buyer from that point forward. If taxes have already been paid for the full year, the buyer typically reimburses the seller for their portion. If taxes haven’t been paid yet, the seller credits the buyer for the amount owed up to closing.
These prorations are based on the tax calendar and local regulations some states use a 360-day year, while others use 365 days for calculations.
Real-World Example
Suppose the annual property tax is £3,650, and the closing date is July 1st. That means the seller has lived in the property for exactly half the year. At closing, the seller would be responsible for 182.5 days of taxes or £1,825 and the buyer would cover the remaining £1,825.
If the taxes were not yet paid, the seller would credit the buyer £1,825 at closing, ensuring the buyer can pay the full bill later but not be unfairly charged for time the seller owned the home.
Why Tax Proration Matters
Tax proration ensures fairness in real estate transactions. Without it, one party might end up paying a tax bill that covers a time period they didn’t own the property. For buyers, it helps avoid surprise expenses shortly after moving in. For sellers, it ensures they don’t pay more than their share when taxes are due after the sale.
It also helps maintain accuracy in the closing process, where every dollar is accounted for and agreed upon before funds change hands.
Tax Proration in Escrow States
In some U.S. states, property taxes are collected in arrears, meaning the bill due in the current year actually covers the previous year's tax period. This can complicate tax proration at closing, especially when neither the buyer nor seller has yet received the final tax bill. In these cases, the title company often uses the most recent tax assessment as a basis for estimating the proration. Later, once the actual tax bill is issued, either party may owe additional money or receive a refund if the estimate was off something to clarify in the closing contract.
Tips for Buyers and Sellers
Both parties should carefully review the tax proration section on the Closing Disclosure or settlement statement before signing. If you're a buyer, ask whether the seller is providing a credit for unpaid taxes, and make sure your escrow account is funded properly to cover the upcoming bill. If you're the seller, confirm you're only paying for the portion of the year you owned the home. A small error in proration can mean hundreds of dollars gained or loss so it pays to double-check the math and ensure transparency.
Final Thoughts
Tax proration may not be the most exciting part of a real estate transaction, but it plays a crucial role in ensuring both buyer and seller pay their fair share of property taxes. Whether you’re buying or selling, make sure to review your settlement statement and ask your agent or escrow officer to explain how the proration was calculated. Understanding it upfront helps prevent confusion and keeps the transaction fair and transparent.
