How to Calculate Prorated Taxes at Closing

When buying or selling a property, it is essential to calculate prorated taxes at closing accurately. Prorated taxes are the portion of property taxes that are divided between the buyer and seller based on the time each party owns the property during the tax year. This ensures a fair distribution of the tax burden. Here is a step-by-step guide on how to calculate prorated taxes at closing.

Step 1: Determine the tax rate
The first step in calculating prorated taxes is to determine the tax rate. You can find this information by contacting the local tax assessor’s office or checking their website. The tax rate is usually expressed as a percentage of the property’s assessed value.

Step 2: Calculate the annual tax amount
Multiply the tax rate by the assessed value of the property to calculate the annual tax amount. For example, if the tax rate is 2% and the assessed value of the property is \$200,000, the annual tax amount would be \$4,000 (2% x \$200,000).

Step 3: Determine the closing date
Both the buyer and seller need to agree on the closing date. The closing date is crucial because it determines how much of the tax year each party will be responsible for.

Step 4: Calculate the number of days
Count the number of days from the beginning of the tax year until the closing date. For example, if the tax year starts on January 1st and the closing date is March 15th, there would be 74 days.

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Step 5: Divide the annual tax amount by the number of days in the tax year
Divide the annual tax amount by the number of days in the tax year to calculate the daily tax rate. In our example, if the annual tax amount is \$4,000 and there are 365 days in the tax year, the daily tax rate would be approximately \$10.96 (\$4,000 / 365).

Step 6: Multiply the daily tax rate by the number of days each party owns the property
Multiply the daily tax rate by the number of days each party owns the property during the tax year. For example, if the buyer owns the property for 74 days, the prorated tax amount for the buyer would be approximately \$810.04 (\$10.96 x 74).

Step 7: Adjust the closing statement
The prorated taxes for both the buyer and seller should be adjusted on the closing statement. The buyer will usually receive a credit for the prorated taxes paid by the seller, and the seller will be responsible for paying their portion of the prorated taxes.

FAQs:

1. Can prorated taxes be calculated for any type of property?
Yes, prorated taxes can be calculated for any type of property, including residential, commercial, and vacant land.

2. What if the tax rate changes during the tax year?
If the tax rate changes during the tax year, the prorated taxes should be recalculated based on the new rate.

3. Who is responsible for paying the prorated taxes?
The buyer and seller are both responsible for paying their portion of the prorated taxes.

4. Are prorated taxes always calculated at closing?
Yes, prorated taxes are typically calculated at closing to ensure a fair distribution of the tax burden.

5. Can prorated taxes be negotiated between the buyer and seller?
Yes, the prorated taxes can be negotiated between the buyer and seller as part of the purchase agreement.

6. What happens if the closing date is in the middle of a tax quarter?
If the closing date falls in the middle of a tax quarter, the prorated taxes should be calculated based on the number of days each party owns the property during that quarter.

7. Are prorated taxes the same as escrow payments?
No, prorated taxes are different from escrow payments. Prorated taxes are calculated based on the time each party owns the property, while escrow payments are set aside to cover future tax and insurance obligations.

8. Can a real estate agent help with calculating prorated taxes?
Yes, a real estate agent can assist in calculating prorated taxes and ensure accuracy during the closing process.