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the proven resource for selling, financing, maintaining and improving your home
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Free FSBO Guide
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the best
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Prorations - Real Estate Tax & Property
© 2007 Complete Books Publishing, Inc.
Summary: The real estate term for dividing expenses that are paid after they are incurred or are prepaid is called prorations.
To prorate means to divide something so that each person pays his/her fair share. The real estate
term for dividing expenses that are paid after they are incurred or are prepaid is called
prorations. For example, sometimes real estate taxes are paid in arrears. This means that they are
paid currently for the year before. The practical effect of this is that the buyer will in many
cases get a tax bill for time when she did not own the house and therefore was not responsible for
the taxes.
An example will make this easier to understand. Let's say you close on your house on
August 31, 2007. You are responsible for 8 months worth of real estate taxes for 2007. Unfortunately,
the tax bill doesn't arrive until May of 2008. This is where prorations come into play. At the closing,
you will be responsible for 2/3 of the tax bill that will arrive in May, 2008. That means the you the seller will
give the buyer an amount equal 2/3 of the agreed to prorated tax amount and the buyer will pay the real
estate tax bill.
An unusually large increase in the real estate taxes due to a reassessment, rate increase or both
can further complicate matters. With the gains in real estate prices in the recent past, many taxing
bodies have become eager to capture at least part of that gain.
Prorations can also be used to adjust for any expenses that have been paid by the seller ahead of time, such as prepaid mortgage interest,
prepaid casualty insurance, or such items as rent or utility bills.
see Taxes for more on real estate and taxes.
see also Residential Real Estate Contracts.
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