Tax proration is a crucial aspect of real estate transactions that ensures both the buyer and the seller fairly account for property taxes during the closing process. When a property is sold, property taxes are prorated to distribute the responsibility between the buyer and the seller for the portion of the year that each party owned the property.
During the closing, the property taxes are divided between the buyer and the seller based on the number of days each party owned the property. This proration is typically calculated by the closing agent or attorney and is based on the tax rate for the specific jurisdiction where the property is located.
The tax proration process typically involves the following steps:
1. Determining the tax period: The tax period is the duration for which property taxes are levied. It usually starts on January 1st and ends on December 31st of each year.
2. Obtaining tax information: The closing agent or attorney collects the necessary tax information, including the current annual property tax amount and the due dates for tax payments.
3. Calculating the daily tax rate: The annual tax amount is divided by the number of days in the tax period to determine the daily tax rate.
4. Determining ownership dates: The closing agent or attorney establishes the ownership dates for both the buyer and the seller. These dates are typically based on the closing date recorded on the final purchase agreement.
5. Prorating taxes: The tax proration is calculated by multiplying the daily tax rate by the number of days each party owns the property. The resulting amounts are then added or subtracted from the respective party’s closing costs.
6. Adjusting at closing: The prorated tax amounts are adjusted at the closing to ensure both parties pay or receive the correct portion of the property taxes.
FAQs about Tax Proration at Closing:
1. What is tax proration?
Tax proration is the process of dividing property taxes between the buyer and the seller based on the number of days each party owned the property during the tax period.
2. Why is tax proration necessary?
Tax proration ensures that the buyer and the seller are responsible for their fair share of property taxes based on the duration of their ownership.
3. Who calculates the tax proration?
The closing agent or attorney typically calculates the tax proration as part of the closing process.
4. How is the daily tax rate determined?
The annual property tax amount is divided by the number of days in the tax period to establish the daily tax rate.
5. Can tax proration be negotiated?
Tax proration terms are usually included in the purchase agreement and are subject to negotiation between the buyer and the seller.
6. What happens if property taxes are paid in advance?
If property taxes are paid in advance, the party who paid the taxes will be credited for the amount they paid during the proration.
7. Are there any exemptions to tax proration?
Tax proration is a standard practice in most real estate transactions, but specific exemptions can be negotiated between the parties involved.
8. Can tax proration be adjusted after closing?
Once the closing is complete, tax proration amounts are typically final and cannot be adjusted unless there was an error in the calculation.