Proration
Proration is the division of ongoing property expenses such as taxes, insurance, and HOA fees between buyer and seller at closing, based on the portion of the billing period each party owns the property.
Exam Tip
Proration = dividing expenses by days of ownership. Taxes in ARREARS = credit to buyer. Taxes in ADVANCE = credit to seller. Know 365-day and 360-day calculations.
What is Proration?
Proration is the method used at closing to fairly divide ongoing property expenses between buyer and seller based on their respective periods of ownership. Since many expenses are paid in advance or arrears, proration ensures each party pays only for the time they own the property.
Common Prorated Items
| Expense | Typical Billing | Proration Method |
|---|---|---|
| Property Taxes | Annual/Semi-annual | Days of ownership |
| HOA Dues | Monthly/Quarterly | Days of ownership |
| Homeowner's Insurance | Annual | If assumed by buyer |
| Rent | Monthly | If income property |
| Utilities | Monthly | Sometimes prorated |
| Interest | Monthly | Mortgage interest |
Proration Calculation Methods
| Method | Days in Year | Used By |
|---|---|---|
| 365-Day Year | 365 (or 366 leap year) | Most accurate |
| 360-Day Year | 360 (30-day months) | Banking/statutory |
| Actual Days | Varies by month | Per-month calculations |
Basic Proration Formula
Daily Rate = Annual Amount / Days in Year Proration Amount = Daily Rate x Days of Ownership
Example: Property Tax Proration
| Factor | Amount |
|---|---|
| Annual Property Tax | $3,650 |
| Tax Period | January 1 - December 31 |
| Closing Date | April 15 |
| Seller's Days | 105 days (Jan 1 - Apr 15) |
| Daily Rate | $3,650 / 365 = $10/day |
| Seller Owes | 105 x $10 = $1,050 |
Credits vs. Debits
| Situation | Seller | Buyer |
|---|---|---|
| Taxes Paid in Arrears | Credit to buyer | Debit to seller |
| Taxes Paid in Advance | Debit to buyer | Credit to seller |
| Prepaid HOA Dues | Debit to buyer | Credit to seller |
| Rent Collected | Credit to buyer | Debit to seller |
Proration Date Considerations
| Convention | Seller Owns | Buyer Owns |
|---|---|---|
| Day of Closing to Seller | Through closing day | Day after closing |
| Day of Closing to Buyer | Through day before | Closing day forward |
Items Typically NOT Prorated
| Item | Reason |
|---|---|
| Mortgage Payoff | Seller's responsibility in full |
| Transfer Taxes | One-time closing cost |
| Title Insurance | One-time purchase |
| Recording Fees | Per-document charges |
Exam Alert
Proration divides expenses based on DAYS OF OWNERSHIP. Know both 365-day and 360-day methods. Taxes paid in ARREARS = seller credit to buyer. Taxes paid in ADVANCE = buyer credit to seller. The proration date determines who owns which days.
Study This Term In
Related Terms
Closing (Real Estate)
Real EstateClosing is the final step in a real estate transaction where ownership transfers from seller to buyer, documents are signed, funds are exchanged, and the deed is recorded.
Escrow
Real EstateEscrow is a neutral third-party arrangement where money or documents are held until all conditions of a real estate transaction are met.
Closing Costs
Real EstateClosing costs are fees and expenses paid at the real estate closing beyond the property price, typically 2-5% of the loan amount, including lender fees, title insurance, escrow, and prepaid items.