Prorations & Property Tax
~12 min read · Prorate taxes, rent and insurance at closing, and work mill-rate problems.
Two computations close the math domain: prorations that split expenses at closing (day-count discipline) and property-tax problems built on assessed value and mill rates. Both are pure procedure — learn the sequence, collect the points.
Proration procedure
Steps: (1) annual (or monthly) amount; (2) daily rate — 360-day banker's year with 30-day months, or 365-day actual, as the problem states; (3) count the days each party owns (note who owns closing day); (4) multiply; (5) assign debit/credit: items PAID IN ADVANCE by the seller (insurance, prepaid taxes) → credit seller, debit buyer for the unused part; items IN ARREARS (unpaid taxes, accrued interest) → debit seller, credit buyer; rents collected in advance → debit seller, credit buyer.
- Daily rate on the stated basis (360/30 vs 365)
- Advance-paid: credit seller; arrears: debit seller
- Closing-day ownership changes one day of money
Property-tax math
Assessed value = market value × assessment ratio (a state/county percentage). Tax = assessed value × rate, where rates arrive as mills (1 mill = $1 per $1,000 = 0.001), per $100, or percent — convert carefully: 32 mills = 3.2% = $3.20 per $100. Exemptions (homestead) subtract from ASSESSED value before the rate. Special assessments add flat charges. Reverse problems recover market value: tax ÷ rate ÷ ratio.
- Assessed = market × ratio; minus exemptions; × rate
- 1 mill = 0.001; 25 mills = 2.5% of assessed
- Reverse: divide back out through rate then ratio
Transfer taxes and the last conversions
Documentary/transfer taxes charge per increment of price ('$0.55 per $500 or fraction thereof') — divide, ROUND UP to whole increments, multiply. Recording fees are flat. These plus prorations populate the closing statement's tax lines; the CD's arithmetic is exactly these entries netted into cash to close.
Worked example
Market value $350,000; assessment ratio 40%; homestead exemption $25,000 off assessed; tax rate 30 mills. Compute the annual tax. Then: that tax is unpaid (arrears) at a September 15 closing — prorate on a 360-day/30-day-month basis, seller owns closing day. Finally: transfer tax at $0.70 per $500 on the $350,000 price.
Tax: assessed = 350,000 × 0.40 = 140,000; minus exemption → 115,000; × 0.030 (30 mills) = $3,450/year. Proration: daily rate = 3,450 ÷ 360 = $9.5833; seller's period = Jan 1–Sep 15 on 30-day months = 8 × 30 + 15 = 255 days; seller's share = 255 × 9.5833 = $2,443.75 — unpaid, so debit seller, credit buyer $2,443.75. Transfer tax: 350,000 ÷ 500 = 700 increments (exact) × 0.70 = $490, typically a seller debit by custom. Three procedures, zero concepts left to chance: ratio-exemption-mills in order, days on the stated basis, increments rounded up.
Common exam pitfalls
Applying the mill rate to market value.
Rate applies to ASSESSED value (after ratio and exemptions) — the two-step most answers are built to punish.
Sliding between 360 and 365 conventions.
One basis per problem, stated or chosen — and it governs both the daily rate and the day count.
Rounding transfer-tax increments down.
'Or fraction thereof' means round UP to the next whole increment before multiplying.
Ratio, exemption, mills — then days on one calendar, and increments always round up.
Recap
- Assessed = market × ratio − exemptions; tax = assessed × mills/1,000
- 1 mill = $1 per $1,000 of assessed value
- Prorate: daily rate × owned days on the stated basis
- Arrears: debit seller/credit buyer; prepaid: reverse
- Transfer tax: round increments UP, then multiply
- Reverse problems divide back through the same chain
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