Proration
The division of ongoing property expenses (taxes, HOA dues, rents) between buyer and seller at closing based on their respective days of ownership.
What Is Proration?
Proration is the process of fairly dividing ongoing property expenses and income between the buyer and seller at closing, based on each party's days of ownership during a given billing period. The principle is simple: the seller pays for the days they owned the property, and the buyer pays for the days they will own it. Commonly prorated items include property taxes (the largest and most frequently tested proration), HOA dues, prepaid rent from tenants (if the property is tenant-occupied, the buyer gets the rent for their share of the month), homeowner's insurance (if the buyer assumes the seller's policy), and utility bills. The daily rate is calculated by dividing the annual (or monthly) amount by the number of days in the period — typically 365 for a calendar year (the statutory year method) or 360 in some markets using the banker's year method (12 months of 30 days each). The seller is responsible for expenses through the day of closing, and the buyer is responsible from the day after closing. Whether the closing day itself is charged to the buyer or seller varies by local custom and contract terms, though it is most commonly charged to the seller. On the Closing Disclosure, prorations appear as credits and debits: if taxes have been paid in advance, the buyer credits (reimburses) the seller for the unused portion; if taxes are in arrears (not yet paid), the seller credits the buyer for the accrued amount.
Proration Formulas
ƒ Key Formulas
Proration in Practice
Property taxes of $5,400/year are paid in arrears (at the end of the year). Closing is June 15 (day 166). Daily rate = $5,400 ÷ 365 = $14.79. Seller owes for 166 days: 166 × $14.79 = $2,455.14 credit to the buyer. This amount appears as a debit to the seller and a credit to the buyer on the Closing Disclosure. The buyer will later pay the full annual tax bill and has already been compensated for the seller's share. If taxes were prepaid for the full year, the calculation reverses: the buyer would reimburse the seller for the remaining 199 days.
Why Proration Matters
Proration ensures neither party pays more than their fair share of ongoing property expenses. It is a core closing and settlement concept tested on every state's real estate exam because it requires both mathematical calculation and an understanding of debits and credits on the Closing Disclosure. For practicing agents, accurately explaining prorations to clients builds trust and prevents disputes at the closing table. Proration calculations are also one of the most math-heavy exam topics — mastering the three-step process (daily rate, count days, multiply) is essential for passing the math section.
Key Factors That Affect Proration
- 1.Whether taxes are paid in arrears or in advance completely changes the proration direction. In arrears: the seller credits the buyer (seller owes for days already used). In advance: the buyer credits the seller (seller prepaid for days they won't own the property).
- 2.The calculation method (365-day vs. 360-day) varies by market and exam question. The statutory year method uses 365 days. The banker's year method uses 360 days (12 months × 30 days). Always check which method the exam question specifies.
- 3.Closing day assignment varies by local custom. In most markets, the seller is charged for the day of closing. Some jurisdictions charge the buyer. The purchase contract may specify. On the exam, read the question carefully.
- 4.Multiple items may be prorated at closing. Property taxes, HOA dues, rent from tenants, and prepaid insurance may all require separate proration calculations on the same Closing Disclosure.
- 5.Prorations appear on the Closing Disclosure as credits and debits. A credit to the buyer is a debit to the seller (and vice versa). Understanding this double-entry relationship is essential for reading settlement statements.
Common Mistakes With Proration
- ✗Not knowing whether taxes are in arrears or in advance. This is the single most common proration error. If taxes are in arrears, the seller credits the buyer. If taxes are prepaid in advance, the buyer credits the seller. Getting this backwards reverses the entire calculation.
- ✗Using the wrong day count method. If the exam says 'use a 360-day year,' use 360. If it says 'use a 365-day year' or says nothing, use 365. Using the wrong divisor produces an incorrect daily rate.
- ✗Miscounting the seller's days. Count from January 1 (or the start of the billing period) through and including the closing date for the seller's share. Off-by-one errors are common.
- ✗Confusing prorations with closing costs. Prorations are adjustments that divide ongoing expenses fairly between buyer and seller. Closing costs are transaction-specific fees (origination, title, recording) that are not split based on days of ownership.
- ✗Forgetting to prorate rent on tenant-occupied properties. If the seller has collected the full month's rent and closing occurs mid-month, the buyer is entitled to a credit for their share of the month's rent.
Proration vs. Related Metrics
Closing costs are one-time transaction fees (origination, title insurance, recording). Prorations are adjustments to ongoing expenses divided by days of ownership. Both appear on the Closing Disclosure but serve different purposes.
Escrow is the neutral third party that handles funds during the transaction and calculates prorations. Proration is the mathematical process of dividing expenses. The escrow agent or closing attorney performs the proration calculations and applies them to the settlement statement.
Transfer tax is a one-time tax on the sale itself, not an ongoing expense. It is not prorated — it is charged to one party (typically the seller) as a closing cost.
How Proration Appears on the Real Estate Exam
Common question types, tested concepts, and what to watch out for
Three steps: (1) find the daily rate (Annual Amount ÷ 365 or 360), (2) count the days belonging to the seller (January 1 through closing date, inclusive), (3) multiply. Know whether taxes are paid in arrears or in advance — this determines who credits whom. Closing day is typically the seller's responsibility. On the exam, read the problem carefully for 365-day vs. 360-day (banker's year) instructions.
Frequently Asked Questions About Proration
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