A property has annual property taxes of $3,600, which the seller has paid through December 31. The sale closes on October 1, and the parties prorate on a twelve-month basis. How much does the buyer owe the seller as a proration?
Correct Answer
A) $900
Divide the annual tax by twelve to get the monthly rate: $3,600 divided by 12 is $300 a month. The seller has already paid the taxes for October, November, and December, three months during which the buyer will own the property, so the buyer reimburses the seller $300 times 3, or $900. A prepaid item is credited to the seller and debited to the buyer; an item that has accrued but has not been paid runs the other way, as a credit to the buyer and a debit to the seller.
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Proration is the process of dividing expenses or income between the buyer and seller at the closing of a real estate transaction. This ensures each party pays or receives only their fair share based on the period of ownership.
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