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
Answer B ($912) results from using 76 days instead of 74, a common error made by miscounting March (e.g., counting through March 17 instead of March 15) or incorrectly adding an extra day for each month boundary.
$876
Answer C ($876) results from using only 73 days (perhaps omitting the closing day itself or miscounting February as 27 days), which understates the seller's actual ownership period and produces an incorrect proration.
$900
Answer D ($900) results from using 75 days, likely from a miscounting error such as including an extra day in January or February, and does not reflect the correct 74-day count from January 1 through March 15.
Why is this correct?
Using the 365-day method, the daily tax rate is $4,380 ÷ 365 = $12.00 per day. Counting the days from January 1 through March 15 yields 31 (January) + 28 (February) + 15 (March) = 74 days, and 74 × $12 = $888, which matches answer A. The seller is debited $888 at closing, and the buyer receives a corresponding credit to cover the taxes the buyer will eventually pay for the seller's ownership period.
Deep Analysis
AI-powered in-depth explanation of this concept
Property tax proration ensures that each party pays only for the portion of the year they actually own the property, reflecting the principle that tax liability should align with ownership duration. Because property taxes are often paid in arrears (after the period they cover), the seller typically owes a credit to the buyer at closing for the days the seller held the property but hasn't yet paid taxes on. This proration mechanism prevents unjust enrichment — without it, the buyer would end up paying taxes for a period during which they didn't own the property. The 365-day method divides the annual tax by exactly 365 to get a precise daily rate, as opposed to the 30-day-month (360-day) banker's method.
Knowledge Background
Essential context and foundational knowledge
Property tax proration at closing became a standard real estate practice as escrow and title settlement procedures were formalized in the 20th century, codified in part through RESPA (Real Estate Settlement Procedures Act, 12 U.S.C. § 2601 et seq.) enacted in 1974, which standardized closing cost disclosures including prorations. Before such standardization, disputes over who owed what portion of taxes were common and costly. The two dominant proration methods — the 365-day method and the 30/360 banker's method — emerged to give parties a consistent, agreed-upon calculation framework. Most state licensing exams, including national PSI and Pearson VUE exams, specify which method to use in the question, so test-takers must always read carefully.
Podcast Transcript
Full conversation between instructor and student
Instructor
Hey there, let's dive into today's real estate math question. It's a bit of a doozy, so I'm excited to see how you tackle it.
Student
Sure thing, Instructor. The question is about property taxes, right? It says the annual property taxes are $4,380, and the property closes on March 15. But it's a bit tricky because the seller hasn't paid taxes for the current year.
Instructor
Exactly! This question is testing your understanding of proration in real estate transactions. It's all about dividing the annual property taxes fairly between the buyer and seller, especially when the property closes mid-year.
Student
Got it. So, I need to figure out how many days the seller owned the property and then calculate their share of the taxes. But how do I determine the daily tax rate?
Instructor
Great question. First, you divide the annual property taxes by the total number of days in the year. Since it's a non-leap year, we'll use 365 days. So, $4,380 divided by 365 gives you the daily tax rate.
Student
Okay, so $4,380 / 365 is about $12. So, I just need to multiply that by the number of days the seller owned the property, right?
Instructor
That's the idea. But here's where it gets tricky. You need to accurately calculate the number of days between January 1 and March 15. Remember, February has 28 days in a non-leap year.
Student
Right, so January has 31 days, February has 28, and then March has 15. That adds up to 74 days. So, I multiply 74 by $12, which equals $888.
Instructor
Exactly! You've nailed it. The correct answer is A. $888. Now, let's talk about why the other options are wrong. Option B uses the wrong number of days, and Option C is just a bit short. Option D seems like a rounded figure that doesn't match the precise calculation.
Student
I see. So, it's all about getting the number of days right and using the correct daily tax rate.
Instructor
Absolutely. And to help you remember, here's a memory technique. 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, and the right side is the buyer's. Visualize dividing the annual tax proportionally based on these segments.
Student
That's a great way to visualize it. Thanks for the tip, Instructor. I'll definitely keep that in mind.
Instructor
You're welcome! And remember, for proration questions, always confirm the number of days in the year and carefully count the days between the dates. It's crucial for accurate closing statements and preventing disputes.
Student
Thanks, Instructor. I feel a lot more confident now. I'm ready to tackle more real estate math questions!
Instructor
You're doing great, and I'm sure you'll do well on the exam. Keep practicing, and you'll ace those real estate math questions in no time!
Use the phrase 'JAN-FEB-MARCH to the date' and count on your fingers: January has 31 days (full month), February has 28 days (full month), and March contributes only 15 days — write it as 31 + 28 + 15 = 74, then multiply by the daily rate. Visualize a calendar where you literally cross off each day from New Year's Day through March 15, and the stack of 74 crossed-off days represents the seller's tax debt. The daily rate of $12 is easy to remember because $4,380 ÷ 365 = $12 exactly — a clean number that signals you're on the right track.
When faced with proration questions, quickly visualize this calendar to determine which days belong to which party.
Always write out the day count explicitly — 31 + 28 + 15 = 74 — rather than doing it mentally, because one miscount changes your answer entirely and all four distractors are designed around common counting errors. Confirm the day-count method (365 vs. 360) stated in the question before dividing the annual tax, as mixing methods is the single biggest source of wrong answers on proration problems. If your daily rate comes out to a clean whole number like $12, that's a good sign; if it's a messy decimal, double-check your division before proceeding.
Real World Application
How this concept applies in actual real estate practice
Imagine a homeowner in Chicago selling their property with a closing date of March 15. The annual tax bill of $4,380 won't be due until later in the year, but the seller has owned the home for 74 days of the current tax year. At the closing table, the settlement agent debits the seller $888 and credits the buyer the same amount on the HUD-1 or Closing Disclosure. When the tax bill arrives later, the buyer pays the full $4,380 but has already been compensated $888 by the seller, so the buyer's net tax cost is only $3,492 — perfectly reflecting their actual ownership period.
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