Annual property taxes are $4,380. The property closes on March 15. If the seller has NOT paid taxes for the current year, how much does the seller owe at closing? (Use 365 days)
Audio Lesson
Duration: 3:08
Question & Answer
Review the question and all answer choices
$888
$912
This option incorrectly calculates the daily rate as $12 but uses 76 days instead of 74, adding two extra days to the calculation (possibly including March 15 or miscounting days).
$876
This option results from using 73 days instead of 74 (likely missing March 15 or counting February as 27 days), leading to an underpayment of the seller's tax obligation.
$900
This option appears to be a rounded figure that doesn't match the precise calculation. It might result from using an approximation method or incorrectly calculating the daily rate as $12.16.
Why is this correct?
CORRECT_ANSWER
Deep Analysis
AI-powered in-depth explanation of this concept
Proration is a fundamental concept in real estate transactions that ensures fair distribution of property expenses between buyers and sellers. This question tests your ability to calculate a seller's share of annual property taxes when the property closes mid-year. The process involves determining the daily tax rate and multiplying it by the number of days the seller owned the property. What makes this question challenging is the need to accurately calculate the number of days between January 1 and March 15, including accounting for February in a non-leap year. This connects to broader real estate knowledge about closing statements and proration of expenses, which is crucial for ensuring accurate closing statements and preventing disputes between parties.
Knowledge Background
Essential context and foundational knowledge
Proration is the process of dividing expenses or income between buyer and seller based on the portion of the year each party owns the property. Property taxes are typically prorated at closing because they are usually paid annually but the property ownership changes during the year. Most states require this proration to appear on the closing statement. The standard approach is to calculate the daily rate and multiply by the days each party is responsible for. This ensures neither party overpays or underpays for property taxes during their ownership period.
Imagine a calendar with January 1 on the left and December 31 on the right. Draw a line at March 15. The left side represents the seller's responsibility (74 days), the right side the buyer's responsibility (291 days). Visualize dividing the annual tax proportionally based on these segments.
When faced with proration questions, quickly visualize this calendar to determine which days belong to which party.
For proration questions, first confirm the number of days in the year specified (365 or 360), then carefully count days between dates, remembering February has 28 days unless specified otherwise.
Real World Application
How this concept applies in actual real estate practice
A listing agent meets with sellers who are concerned about their net proceeds from their home sale. The agent explains that property taxes will be prorated at closing. The sellers ask how much they'll need to credit the buyer. The agent calculates that with annual taxes of $4,380 and a March 15 closing, they'll owe $888 for the portion of the year they owned the property. This transparency helps sellers understand their actual financial position at closing.
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