8.3 Proration, Transfer Tax, and Investment Math
Key Takeaways
- Proration divides an annual expense by 365 (or 360 on the banker's-year basis the question specifies) to find a daily rate, then multiplies by the days each party owns.
- A prepaid item like taxes the seller already paid produces a buyer debit and seller credit; an unpaid item the buyer will pay later produces a seller debit and buyer credit.
- Transfer tax equals the taxable price divided by the stated increment, then multiplied by the per-increment rate.
- Investment return uses Rate = Income / Value; profit percentage is gain divided by original cost, not by sale price.
Proration at closing
Proration splits recurring costs — property taxes, HOA dues, prepaid rent, fuel — fairly between buyer and seller based on who owns the property each day. The exam method has two consistent steps:
- Find the daily rate: divide the annual (or monthly) amount by the number of days in the period. The question tells you whether to use a 365-day calendar year or a 360-day banker's year (twelve 30-day months).
- Multiply by each party's days of ownership.
The seller customarily owns the day of closing in most jurisdictions unless the problem states otherwise. Read the convention the question gives and use it exactly.
A worked tax proration
Annual property tax is $3,650, already paid in full by the seller for the calendar year. Closing is on day 200 of a 365-day year, and the seller owns through the closing day.
| Step | Calculation | Result |
|---|---|---|
| Daily rate | $3,650 / 365 | $10.00/day |
| Seller's days (1–200) | 200 × $10.00 | $2,000 |
| Buyer's days (201–365) | 165 × $10.00 | $1,650 |
Because the seller prepaid the whole year, the buyer must reimburse the seller for the 165 days the buyer will own: $1,650 is a buyer debit and seller credit. If instead the tax were unpaid, the seller would owe the buyer for 200 days — a seller debit, buyer credit.
Debit and credit direction
Getting the dollar amount right but the direction wrong still loses the point. Use this rule:
- Seller prepaid an expense covering time after closing → buyer owes seller → buyer debit, seller credit.
- Expense unpaid for time the seller owned → seller owes buyer → seller debit, buyer credit.
- Prepaid rent the seller collected for days the buyer will own → seller debit, buyer credit (buyer gets the rent).
Think about who used the money or service versus who actually paid. The party who benefited but did not pay ends up debited.
360-Day Prorations, Rent Splits, and the New Hampshire Transfer Tax
Many exams switch to the banker's year (360 days, twelve 30-day months) for prorations, which changes the daily rate.
Worked 360-day tax proration
Annual tax is $5,400, unpaid, on a closing dated April 16 using a 360-day year; the seller owns the day of closing.
- Daily rate = $5,400 / 360 = $15.00/day.
- Seller's days = Jan (30) + Feb (30) + Mar (30) + 16 = 106 days.
- Seller's share = 106 x $15.00 = $1,590 -> seller debit, buyer credit (tax is unpaid, seller owed the buyer for the time the seller held the property).
Worked rent proration
A seller has collected $1,800 April rent and closes April 16 (seller owns the closing day) in a 30-day-month convention. The buyer owns days 17-30 = 14 days. Daily rent = $1,800 / 30 = $60; buyer's share = 14 x $60 = $840, paid to the buyer as a seller debit / buyer credit, because the seller collected money for days the buyer will own.
New Hampshire Real Estate Transfer Tax (RSA 78-B)
New Hampshire imposes a transfer tax of $0.75 per $100 of price on each side of the transaction — buyer and seller each pay $0.75/$100, for a combined $1.50 per $100 (a minimum tax of $20 per party applies). On a $400,000 sale: each party owes $400,000 / 100 x $0.75 = $3,000, and the combined state transfer tax is $6,000. This is a high-yield New Hampshire number: the National portion teaches the method (price / increment x rate), and New Hampshire's specific split, dual-side structure is exactly the kind of state-specific figure the 40-question state portion targets.
Always confirm whether a question wants one side's share or the combined total.
Annual taxes of $2,920 were paid in full by the seller using a 365-day year. The sale closes on the 100th day, with the seller responsible through closing. What is the proration and direction?
Transfer and recordation tax
Transfer tax is charged on the sale price, usually as a rate per increment of value (for example, $1.00 per $500 of price). The method is: divide the price by the increment, then multiply by the per-increment charge.
A $300,000 sale taxed at $1.00 per $500: $300,000 / $500 = 600 increments × $1.00 = $600. If a problem rounds up to the next full increment, do so before multiplying. When the rate is quoted as a flat percentage instead, simply multiply: a 0.5% transfer tax on $300,000 is $300,000 × 0.005 = $1,500.
Investment return and profit
Investment questions reuse the value triangle and add a profit measure. Rate of return = Annual Net Income ÷ Value (or price paid). A property bought for $250,000 that nets $20,000 a year returns $20,000 / $250,000 = 8%.
Percentage profit = Gain ÷ Original Cost. A property bought for $200,000 and sold for $250,000 gained $50,000; profit = $50,000 / $200,000 = 25%. The frequent trap divides the gain by the sale price ($50,000 / $250,000 = 20%). Profit and percent-change are always measured against the original basis, never the new, larger number.
Equity and seller net
Two more figures round out investment math. Equity equals current value minus what is still owed: a home worth $320,000 with a $190,000 loan balance holds $130,000 in equity. As the loan amortizes and value appreciates, equity grows from both directions.
Seller's net is what the seller keeps after costs. From the sale price, subtract the loan payoff, commission, and closing costs. A $400,000 sale with a $250,000 payoff, 6% commission ($24,000), and $3,000 in other costs nets $400,000 − $250,000 − $24,000 − $3,000 = $123,000. Net-to-seller problems are simply a chain of subtractions; list every cost before computing.
Putting the math segment together
Across all three sections the same disciplines win points: convert to one unit, identify which variable is unknown, apply each rate only to its correct base, and confirm the direction or unit the answer requires. Carry a few constants in memory — 43,560 sq ft per acre, 640 acres per section, 27 cubic feet per cubic yard, one point equals 1% of the loan — and most national math questions reduce to a single multiplication or division you can do confidently under time pressure.
Work every problem on scratch paper rather than in your head, label units beside each number, and re-read the final sentence to confirm what is actually being asked. The exam rewards a slow, deliberate setup far more than speed.