Understanding Property Tax Prorations

Understanding Property Tax Prorations

What is a proration?

The purpose of a proration in a sale escrow is to fairly divide property expenses such as taxes and association dues between the Seller and Buyer so that each party is paying only for those days which he actually owns the property.

About the Tax Year

The tax year runs from July 1 of any year to July 1 of the following year. It does not follow the standard calendar year. For example, a tax year might be described as the 2006-2007 tax year, meaning the time period from July 1, 2006 to July 1, 2007.

The tax year is divided into two (2) installments.

  • The 1st installment is the time period between July 1 and January 1. The tax payment is due November 1 and delinquent after December 10.
  • The 2nd installment is the time period between January 1 and July 1. The tax payment is due February 1 and delinquent after April 10.
 
1st Installment – July 1 to January 1
2nd Installment – January 1 to July 1

How is the tax proration figured?

The first step is to determine the date to which the taxes are paid.
  • If the Seller (or escrow holder) pays (or paid) the 1st half, then taxes are paid to January 1.
  • If the Seller (or escrow holder) pays (or paid) the 2nd half, then taxes are paid to July 1.
If the Seller’s last tax payment covered a time period beyond the close of escrow, the proration is made from the close of escrow to the date to which the taxes are paid. The proration is a credit to the Seller and a charge to the Buyer.
  • Example: Close of escrow is November 22, 2006.
  • Seller pays the 1st installment of taxes which brings the taxes current to January 1, 2007
  • Seller is credited and Buyer is debited from November 22, 2006 to January 1, 2007. This reimburses the Seller for the days within that tax period that he no longer owns the property.
If the escrow closes before the tax due date arrives for a particular tax period, the proration is made from the first day of the installment to the close of escrow. The proration is a charge to the Seller and credit to the Buyer.
  • Example: Close of escrow is January 15, 2007.
  • Seller has NOT paid the 2nd installment.
  • Seller is debited and Buyer is credited from January 1, 2007 to January 15, 2007.
  • This proration reimburses the Buyer for the days that the Seller owned the property within that tax period.
  • Buyer is responsible for payment of the 2nd installment which is due February 1. If the Buyer is obtaining new financing, the lender is likely to require that the Buyer pay this tax bill through escrow.

How is the tax proration figured?

At closing, if the Seller has not yet made a payment which is due, the Seller is charged with the amount of the installment.
If the lender in the transaction requires that a future tax payment be made, this payment is a charge to the account of the Buyer. The Seller is only responsible for making tax payments that come due during the time period that the Seller owns the property.
On the day of closing, the Buyer is the owner of the property, and the Buyer is responsible for tax bills that come due on or after that date.

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