Closing & Settlement
~11 min read · Prorate taxes and rents, assign debits and credits, and know who conducts closing.
Closing is where promises become money and title: prorations split the year's expenses, debits and credits build the settlement statement, and recording perfects the transfer. The exam's proration arithmetic is free points for anyone who practices the day-count.
The closing framework
Closing (settlement) may be a sit-down table event or an escrow closing — a neutral escrow agent gathering documents and funds, then recording and disbursing when every condition is met. Seller's side: deliver marketable title via the agreed deed, payoff of liens, prorated obligations. Buyer's side: funds, financing documents, insurance. The settlement statement (ALTA/Closing Disclosure in residential lending) itemizes each party's debits (charges) and credits (receipts). RESPA/TRID timing rules govern lender-involved residential closings.
- Escrow closings: neutral agent, conditions, then record + disburse
- Debits charge you; credits pay you — each side has its own column
- CD/ALTA statements are the accounting of record
Proration mechanics
Ongoing expenses are prorated to the closing date: property taxes (often paid in arrears — seller owes the buyer their unpaid share: debit seller, credit buyer), prepaid items like insurance or already-paid taxes (credit seller, debit buyer), rents collected in advance (debit seller, credit buyer), and interest. Conventions: the statutory/banker's year (360 days, 30-day months) or actual/365-day calendar — the problem states which — plus who owns closing day. The method: annual amount ÷ days-in-year × days owed.
- Arrears items: seller pays their used share → debit seller, credit buyer
- Prepaid items: buyer reimburses → credit seller, debit buyer
- 360 vs 365-day conventions; read the problem
- Daily rate × days = the proration
Standard debits and credits
Buyer credits: earnest money, loan proceeds, seller-owed prorations. Buyer debits: purchase price, lender fees, prepaid escrow, owner's title (per custom). Seller credits: purchase price, prepaid reimbursements. Seller debits: loan payoff, commission, transfer taxes (per custom), arrears prorations, deed preparation. Transfer/documentary taxes compute per state formula on the price. After signing: record the deed and security instrument, then disburse — recording perfects priority.
Worked example
Closing June 15 (day 166 of a 365-day year; buyer owns closing day). Annual property tax of $4,380 is paid IN ARREARS (due at year-end, unpaid). The seller also collected June rent of $1,800 from the basement tenant on June 1. Compute both prorations and their statement entries.
Taxes: the seller occupied January 1 through June 14 — 165 days. Daily rate = 4,380 ÷ 365 = $12.00. Seller's share = 165 × 12 = $1,980 → the tax is unpaid, so the buyer will pay the full bill later: debit seller $1,980, credit buyer $1,980. Rent: June has 30 days; the seller keeps June 1–14 (14 days) and owes the buyer June 15–30 (16 days, buyer owning closing day). Daily rent = 1,800 ÷ 30 = $60. Buyer's share = 16 × 60 = $960 → rent was collected in advance by the seller: debit seller $960, credit buyer $960. Two rules did all the work: arrears flow seller→buyer; advance-collected income flows seller→buyer; prepaid expenses would flow the other way.
Common exam pitfalls
Reversing the arrears logic.
Unpaid-yet expenses the seller incurred = debit seller, credit buyer. Already-paid items covering the buyer's period = credit seller, debit buyer.
Mixing day-count conventions mid-problem.
Choose the stated basis (360/30 vs 365/actual) and use it for both the daily rate and the day count.
Forgetting who owns closing day.
The problem assigns it — one day at $60 of rent or $12 of tax changes the answer choices.
Used-but-unpaid: seller pays forward. Paid-but-unused: buyer pays back. Count the days, split the year, record, disburse.
Recap
- Escrow closings: conditions met → record → disburse
- Debits charge, credits pay — per party
- Arrears (taxes): debit seller / credit buyer; prepaids reverse
- Advance rents: debit seller / credit buyer
- Daily rate × days, on the stated 360- or 365-day basis
- Recording the deed and lien perfects the transfer
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