Prorations

When a home changes hands, certain ongoing expenses have to be divided fairly between the two parties based on how long each owned the property during a given period. Prorations are the calculation that handles this.

Property taxes are the most common example. Because taxes are often paid in arrears (meaning the bill covers a period already elapsed), and because closings rarely fall exactly at the beginning or end of a tax period, the transaction needs to account for each party's fair share. The closing agent or attorney performs this calculation as part of the closing settlement.

HOA dues are another common proration item. If the seller has prepaid dues for a period extending beyond the closing date, the buyer typically credits the seller for that overage.

Prorations affect both the seller's net proceeds and the amount the buyer needs to bring to closing. If property taxes have already been paid for a period extending beyond the closing date, the buyer credits the seller. If taxes are owed but unpaid for the period the seller owned the home, the seller's proceeds are adjusted accordingly.

Understanding how prorations work helps both parties interpret their closing statements and avoid surprises when reviewing the Closing Disclosure.

Hypothetically: a seller owned a home through September 30. The annual property tax bill for the full calendar year is $2,400, due in November but covering January through December. At closing, the closing attorney calculates that the seller owes taxes for January 1 through September 30, nine months, or $1,800. That amount is debited from the seller's proceeds at closing, and the buyer receives a credit. The buyer will then be responsible for paying the full $2,400 annual bill in November when it comes due.

"Prorations and prepaid taxes are the same thing."

They're different calculations that can both appear on the Closing Disclosure. A proration divides an existing expense between buyer and seller based on ownership timing, settling what each party owes for time already elapsed. Prepaid taxes are funds collected by the lender upfront to fund the escrow account that will pay the buyer's future tax bills. A single transaction can involve both.