6.3 Closing Statement Mathematics, Prorations & Debits/Credits

Closing Statement Mathematics, Prorations & Debits/Credits

Core Principle: A real estate closing is the final consummation of a real estate transaction where title conveys, consideration is transferred, loan funds disburse, and transaction expenses are allocated. Under Florida practice, closing statements follow strict double-entry accounting rules and statutory 365-day calendar year proration standards.

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1. Closing Statement Architecture & Double-Entry Principles

Real estate settlement statements—whether rendered on the federal TRID Closing Disclosure (CD) for residential mortgage transactions or the ALTA Settlement Statement—organize financial items into Debits and Credits across separate buyer and seller balance sheets:

┌────────────────────────────────────────────────────────────────────────┐
│                     SETTLEMENT ACCOUNTING PRINCIPLES                   │
├──────────────────────────────────┬─────────────────────────────────────┤
│          DEBITS (CHARGES)        │         CREDITS (PAYMENTS)          │
├──────────────────────────────────┼─────────────────────────────────────┤
│ • An expense, charge, or owed    │ • An amount received, credited,     │
│   obligation.                    │   deposited, or equity asset.       │
│ • Increases cash required from   │ • Reduces cash required from buyer; │
│   buyer; reduces net cash        │   increases net cash proceeds       │
│   proceeds to seller.            │   payable to seller.                │
└──────────────────────────────────┴─────────────────────────────────────┘

Single-Entry vs. Double-Entry Items

• Double-Entry Items: Financial items that affect both parties simultaneously. The exact dollar amount debited to one party is credited to the other party (e.g., Purchase Price, Property Tax Prorations, Rent Prorations, Tenant Security Deposits, Assumed Mortgages).
• Single-Entry Items: Financial items that involve a payment between one party and an outside third party (e.g., closing agent, lender, surveyor, state government, broker). These appear on only one party's statement with no corresponding entry on the other side:
  • Single-Entry Buyer: Earnest Money Deposit (credited from escrow), New Mortgage Proceeds (credited from lender), Intangible Tax (debited to state), Lender's Title Policy (debited to title company), Recording Fees for Deed/Mortgage (debited to clerk of court).
  • Single-Entry Seller: Existing Mortgage Payoff (debited to lender), Doc Stamps on Deed (debited to state), Broker Commission (debited to brokerage), Deed Preparation Fee (debited to attorney).

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2. Florida Statutory Proration Rules & Calendar Methodology

Proration is the proportional division of property-related expenses and income between the buyer and seller based on the time each party owns the property during the billing period.

The 365-Day Exact Calendar Year Method

Florida real estate licensing exams use the exact 365-day calendar year method (366 days in a leap year). Calculations must utilize the exact number of days in each calendar month:

DAYS IN CALENDAR MONTHS:
• January:   31 days    • May:    31 days    • September: 30 days
• February:  28 days*   • June:   30 days    • October:   31 days
• March:     31 days    • July:   31 days    • November:  30 days
• April:     30 days    • August: 31 days    • December:  31 days
*(29 days in leap years)

The Allocation Rule: Midnight Prior to Closing

• Florida Standard Custom & Exam Rule: The seller is responsible for all expenses and entitled to all income through midnight of the day PRIOR to closing.
• Day of Closing: The buyer owns the property on the day of closing and is responsible for all expenses and entitled to all income starting on the closing date.

TIMELINE ALLOCATION:
┌──────────────────────────────────────┬──────────────────────────────────┐
│            SELLER'S TIME             │           BUYER'S TIME           │
│ (Jan 1 through Day BEFORE Closing)   │ (Day of Closing through Dec 31)  │
└──────────────────────────────────────┴──────────────────────────────────┘
                                       ▲
                                  CLOSING DAY
                             (Belongs to BUYER)

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3. Mathematical Formulas for Key Proration Categories

A. Real Estate Property Taxes (Paid in Arrears)

In Florida, real estate taxes are assessed on January 1 for the current calendar year, but tax bills are not mailed until November 1 (payable through March 31 of the following year). Because taxes are paid in arrears, the seller has occupied the property for a portion of the year without paying taxes. At closing, the seller must credit the buyer for the seller's proportional share of taxes from January 1 through the day before closing:

$\text{Daily Tax Rate} = \frac{\text{Total Annual Property Taxes}}{365}$

$\text{Seller Days} = \text{Exact Days from January 1 through Day BEFORE Closing}$

$\text{Proration Amount} = \text{Daily Tax Rate} \times \text{Seller Days}$

$\mathbf{\text{Closing Entry: Debit Seller, Credit Buyer}}$

WORKED EXAMPLE — PROPERTY TAXES:
• Annual Taxes: $4,380.00
• Closing Date: April 16 (Non-leap year)

Step 1: Calculate Daily Rate
  $4,380.00 / 365 days = $12.00 per day

Step 2: Count Seller Days (Jan 1 through April 15)
  January:   31 days
  February:  28 days
  March:     31 days
  April:     15 days (Day before closing!)
  Total = 31 + 28 + 31 + 15 = 105 seller days

Step 3: Calculate Proration Amount
  105 days × $12.00/day = $1,260.00

Settlement Entry: Debit Seller $1,260.00 | Credit Buyer $1,260.00

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B. Rent Prorations (Paid in Advance)

Tenants pay rent in advance on the 1st day of the month. If an income property closes during the month, the seller has already collected the full month's rent. The seller must credit the buyer for the portion of the month that the buyer will own the property (from the closing date through the last day of the month):

$\text{Daily Rent Rate} = \frac{\text{Total Monthly Rent}}{\text{Exact Days in Closing Month}}$

$\text{Buyer Days} = (\text{Total Days in Month} - \text{Closing Day}) + 1$

$\text{Rent Proration} = \text{Daily Rent Rate} \times \text{Buyer Days}$

$\mathbf{\text{Closing Entry: Debit Seller, Credit Buyer}}$

WORKED EXAMPLE — RENT PRORATION:
• Monthly Rent: $1,860.00 (Collected on June 1 by Seller)
• Closing Date: June 12 (June has 30 days)

Step 1: Calculate Daily Rate
  $1,860.00 / 30 days = $62.00 per day

Step 2: Count Buyer Days (June 12 through June 30)
  30 - 12 + 1 = 19 buyer days

Step 3: Calculate Proration Amount
  19 days × $62.00/day = $1,178.00

Settlement Entry: Debit Seller $1,178.00 | Credit Buyer $1,178.00

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C. Tenant Security Deposits & Advance Rents

Under F.S. 83.49 (Florida Residential Landlord and Tenant Act), all tenant security deposits and advance rents held by the seller must be transferred in full (100%) to the buyer at closing. They are never prorated on a daily basis.

$\mathbf{\text{Closing Entry: Debit Seller (Full Amount), Credit Buyer (Full Amount)}}$

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D. Interest on Assumed Mortgages (Paid in Arrears)

Mortgage payments are paid in arrears (the payment made on the 1st of the month pays interest accrued during the prior month). When a buyer assumes an existing mortgage, the buyer will make the next monthly payment covering the entire current month. The seller owes interest for the days the seller occupied the property during the closing month (from the 1st of the month through the day prior to closing):

$\text{Annual Interest} = \text{Assumed Loan Balance} \times \text{Interest Rate}$

$\text{Daily Interest Rate} = \frac{\text{Annual Interest}}{365}$

$\text{Seller Interest Days} = \text{Day of Closing} - 1$

$\text{Assumed Interest Proration} = \text{Daily Interest Rate} \times \text{Seller Interest Days}$

$\mathbf{\text{Closing Entry: Debit Seller, Credit Buyer}}$

WORKED EXAMPLE — ASSUMED MORTGAGE INTEREST:
• Assumed Mortgage Balance: $240,000 at 6.0% annual interest
• Closing Date: October 18

Step 1: Calculate Daily Interest Rate
  $240,000 × 0.06 = $14,400 annual interest
  $14,400 / 365 = $39.45205... per day

Step 2: Count Seller Days
  October 1 through October 17 = 17 seller days

Step 3: Calculate Interest Owed
  17 days × $39.45205/day = $670.68

Settlement Entry: Debit Seller $670.68 | Credit Buyer $670.68

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E. Prepaid Expenses (Paid in Advance by Seller)

If the seller prepaid an annual or quarterly expense prior to closing (e.g., prepaid HOA dues, municipal trash assessments, heating fuel in tank), the buyer must reimburse the seller for the unused portion of the period (from closing day forward):

$\mathbf{\text{Closing Entry: Credit Seller, Debit Buyer}}$

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4. Master Settlement Statement Ledger Matrix

The following matrix summarizes the standard debits, credits, and entry types for all primary closing statement items in Florida:

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5. Fully Reconciled Master Closing Case Study

Transaction Parameters

• Property: Single-family home in Orange County
• Purchase Price: $420,000.00
• Closing Date: August 18 (Non-leap year)
• Earnest Money Deposit: $20,000.00
• Financing: New 1st Mortgage of $315,000.00 (75% LTV) at 6.5% interest
• Existing 1st Mortgage Payoff: $165,400.00
• Annual Property Taxes: $5,475.00 (Unpaid for current year)
• Rental Unit on Property: In-law suite rented for $1,200.00/month (Collected by seller Aug 1)
• Tenant Security Deposit: $1,500.00
• Broker Commission: 6.0% total ($25,200.00 paid by seller)
• Title Insurance: Owner's Policy $2,175.00 (Seller pays); Lender's Policy $550.00 (Buyer pays)
• Recording Fees: Deed $18.50 (Buyer pays); Mortgage $46.00 (Buyer pays); Mortgage Satisfaction $10.00 (Seller pays)
• Legal Fees: Deed Prep $150.00 (Seller pays); Note/Mortgage Prep $200.00 (Buyer pays)
• Appraisal & Credit Report: $650.00 (Buyer pays)

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Step-by-Step Mathematical Calculations

1. Property Tax Proration (365-Day Year)

• Daily Tax Rate = $$5,475.00 / 365 = $15.00\text{ per day}$
• Seller Days (Jan 1 through Aug 17):
  • Jan (31) + Feb (28) + Mar (31) + Apr (30) + May (31) + Jun (30) + Jul (31) + Aug (17) = 229 days
• Seller Tax Share = $229\text{ days} \times $15.00 = \mathbf{$3,435.00}$
• Entry: Debit Seller $3,435.00 | Credit Buyer $3,435.00

2. Rent Proration (August has 31 Days)

• Daily Rent Rate = $$1,200.00 / 31 = $38.709677\text{ per day}$
• Buyer Days (Aug 18 through Aug 31) = $31 - 18 + 1 = \mathbf{14\text{ days}}$
• Buyer Rent Share = $14\text{ days} \times $38.709677 = \mathbf{$541.94}$
• Entry: Debit Seller $541.94 | Credit Buyer $541.94

3. Tenant Security Deposit

• Transferred 100% intact: $\mathbf{$1,500.00}$
• Entry: Debit Seller $1,500.00 | Credit Buyer $1,500.00

4. Florida State Transfer Taxes

• Doc Stamp on Deed (Seller): $($420,000 / 100) \times $0.70 = 4,200 \times $0.70 = \mathbf{$2,940.00}$
• Doc Stamp on Note (Buyer): $($315,000 / 100) \times $0.35 = 3,150 \times $0.35 = \mathbf{$1,102.50}$
• Intangible Tax on New Mortgage (Buyer): $$315,000 \times 0.002 = \mathbf{$630.00}$

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Step-by-Step Balancing Statements

┌────────────────────────────────────────────────────────────────────────┐
│                     BUYER'S SETTLEMENT STATEMENT                       │
├──────────────────────────────────────┬─────────────────────────────────┤
│ DEBITS (Buyer Charges)               │ CREDITS (Buyer Payments/Credits)│
├──────────────────────────────────────┼─────────────────────────────────┤
│ Purchase Price:          $420,000.00 │ Earnest Money Deposit:  $20,000 │
│ Doc Stamp on Note:         $1,102.50 │ New 1st Mortgage:      $315,000 │
│ Intangible Tax on Mtg:       $630.00 │ Property Tax Proration:  $3,435 │
│ Lender's Title Policy:       $550.00 │ Rent Proration:         $541.94 │
│ Recording Fee (Deed):         $18.50 │ Tenant Security Deposit: $1,500 │
│ Recording Fee (Mortgage):     $46.00 │                                 │
│ Note & Mortgage Prep:        $200.00 │                                 │
│ Appraisal & Credit Report:   $650.00 │                                 │
├──────────────────────────────────────┼─────────────────────────────────┤
│ TOTAL BUYER DEBITS:      $423,197.00 │ TOTAL BUYER CREDITS:   $340,476.94
└──────────────────────────────────────┴─────────────────────────────────┘

BUYER'S CASH TO CLOSE RECONCILIATION:
  Total Buyer Debits:   $423,197.00
- Total Buyer Credits:  $340,476.94
───────────────────────────────────
= CASH REQUIRED TO CLOSE: $82,720.06

┌────────────────────────────────────────────────────────────────────────┐
│                     SELLER'S SETTLEMENT STATEMENT                      │
├──────────────────────────────────────┬─────────────────────────────────┤
│ DEBITS (Seller Expenses/Payoffs)     │ CREDITS (Seller Proceeds)       │
├──────────────────────────────────────┼─────────────────────────────────┤
│ Existing Mortgage Payoff:$165,400.00 │ Purchase Price:     $420,000.00 │
│ Brokerage Commission (6%):$25,200.00 │                                 │
│ Doc Stamps on Deed:        $2,940.00 │                                 │
│ Property Tax Proration:    $3,435.00 │                                 │
│ Rent Proration:              $541.94 │                                 │
│ Tenant Security Deposit:   $1,500.00 │                                 │
│ Owner's Title Policy:      $2,175.00 │                                 │
│ Satisfaction Recording Fee:   $10.00 │                                 │
│ Deed Preparation Fee:        $150.00 │                                 │
├──────────────────────────────────────┼─────────────────────────────────┤
│ TOTAL SELLER DEBITS:     $201,351.94 │ TOTAL SELLER CREDITS: $420,000.00
└──────────────────────────────────────┴─────────────────────────────────┘

SELLER'S NET PROCEEDS RECONCILIATION:
  Total Seller Credits: $420,000.00
- Total Seller Debits:  $201,351.94
───────────────────────────────────
= NET CASH TO SELLER:   $218,648.06