7.4 Settlement, Closing Statements, and Prorations

Debits and credits

A closing (settlement) statement reconciles every dollar. The rule:

• Debit = a charge owed by that party (money out / reduces their proceeds or increases their cash needed).
• Credit = money coming to that party (reduces what they owe or adds to proceeds).

The sale price is a debit to the buyer (they owe it) and a credit to the seller (they receive it). The earnest money is a buyer credit — it was already paid in. A new loan is a buyer credit (lender funds the purchase).

The buyer's "cash to close" = total buyer debits − total buyer credits. The seller's net proceeds = total seller credits − total seller debits.

Prorations: the core idea

Proration splits a recurring cost between buyer and seller by who owned/benefited during the period. Two methods:

• 365-day (actual/statutory-actual): use exact days in the month/year.
• 360-day (banker's/statutory): assume 30-day months, 360-day year.

Decide who owns the day of closing (often the seller owns it through closing, or the buyer owns it — the problem will tell you). Prepaid items the seller already paid are credited to the seller / debited to the buyer; items in arrears (owed but unpaid) are debited to the seller / credited to the buyer.

Worked proration problems

Property tax in arrears (paid at year-end)

Annual tax $3,600, billed in arrears. Closing June 30; seller owned Jan 1–June 30 (assume seller owns the closing day). Use the 360-day method.

• Daily rate = $3,600 ÷ 360 = $10/day.
• Seller's months: Jan–June = 6 months × 30 = 180 days.
• Seller's accrued share = 180 × $10 = $1,800.

Because tax is unpaid (arrears), the seller owes their share. On the statement: debit seller $1,800, credit buyer $1,800 (the buyer will pay the full bill later and is reimbursed for the seller's portion now).

Prepaid HOA dues

Monthly HOA $240, the seller prepaid the full June. Closing June 30 using 360-day; seller owns through June 30 — here the seller used essentially the whole month, so little to no reimbursement; instead test a mid-month case:

Closing June 15 (seller owns through the 14th, buyer owns from the 15th):

• Daily HOA = $240 ÷ 30 = $8/day.
• Buyer's days = 16 (June 15–30) × $8 = $128.
• Seller prepaid June, so the buyer owes the seller for the buyer's 16 days: debit buyer $128, credit seller $128.

Rent collected in advance (income proration)

Seller collected $1,500 June rent on June 1 for an income property; closing June 20, 360-day, buyer owns from the 20th (11 days: 20–30).

• Daily rent = $1,500 ÷ 30 = $50/day.
• Buyer's share = 11 × $50 = $550.

The seller holds rent that belongs to the buyer's ownership days, so debit seller $550, credit buyer $550. Rent is the reverse intuition of expenses: prepaid income the seller holds for the buyer's days flows to the buyer.

Trap checklist

• Did you use the method the problem specified (360 vs. 365)? Mixing them is the most common error.
• Did you assign the closing day to the correct party?
• For expenses: prepaid → credit seller; arrears → credit buyer. For rent/income: prepaid held by seller → credit buyer.
• Earnest money is never a seller credit — it is a buyer credit applied to the price.

Transfer Taxes, Title Fees, and a Full Net-to-Seller Worked Problem

Closing statements also carry one-time charges that the exam asks you to place correctly.

• Transfer/recordation taxes are usually a seller debit (local custom varies), charged per dollar of price.
• Owner's title insurance is often a seller cost; the lender's title policy is typically a buyer/loan cost.
• Recording the deed is usually a buyer cost; recording the release of the seller's old mortgage is a seller cost.
• Loan-related fees (origination, appraisal, credit report, lender's title) are buyer debits.

Worked net-to-seller problem: Sale price $300,000. Seller pays off an existing loan of $182,000, a 6% commission, a transfer tax of $0.37 per $100 of price, and $1,400 in other seller costs. Property taxes of $3,600/year are paid in arrears; closing is June 30 (seller owns through closing) using the 360-day method.

• Commission = $300,000 x 0.06 = $18,000.
• Transfer tax = ($300,000 / 100) x $0.37 = 3,000 x $0.37 = $1,110.
• Tax proration (arrears, seller owes 180 days): daily $3,600/360 = $10; 180 x $10 = $1,800 debit to seller.
• Total seller debits = $182,000 + $18,000 + $1,110 + $1,400 + $1,800 = $204,310.
• Net proceeds = $300,000 − $204,310 = $95,690.

The disciplined approach: list every seller debit, subtract from the credit (price), and remember the tax proration in arrears is a seller debit/buyer credit.

Transfer Taxes, Title Fees, and a Full Net-to-Seller Worked Problem

Closing statements also carry one-time charges that the exam asks you to place correctly.

• Transfer/recordation taxes are usually a seller debit (local custom varies), charged per dollar of price.
• Owner's title insurance is often a seller cost; the lender's title policy is typically a buyer/loan cost.
• Recording the deed is usually a buyer cost; recording the release of the seller's old mortgage is a seller cost.
• Loan-related fees (origination, appraisal, credit report, lender's title) are buyer debits.

Worked net-to-seller problem: Sale price $300,000. Seller pays off an existing loan of $182,000, a 6% commission, a transfer tax of $0.37 per $100 of price, and $1,400 in other seller costs. Property taxes of $3,600/year are paid in arrears; closing is June 30 (seller owns through closing) using the 360-day method.

• Commission = $300,000 x 0.06 = $18,000.
• Transfer tax = ($300,000 / 100) x $0.37 = 3,000 x $0.37 = $1,110.
• Tax proration (arrears, seller owes 180 days): daily $3,600/360 = $10; 180 x $10 = $1,800 debit to seller.
• Total seller debits = $182,000 + $18,000 + $1,110 + $1,400 + $1,800 = $204,310.
• Net proceeds = $300,000 − $204,310 = $95,690.

The disciplined approach: list every seller debit, subtract from the credit (price), and remember the tax proration in arrears is a seller debit/buyer credit.