Math Walkthrough
Prorating Property Taxes at Closing, Step by Step
Billing schedules, the day-count convention in customary use, and whether the closing day belongs to the seller or the buyer are all local and are usually fixed by the purchase contract. Every figure below is illustrative and chosen for clean arithmetic; never carry one into an actual closing.
A tax bill covers a period. A sale happens in the middle of one. Proration is the arithmetic that assigns each side the portion of the bill matching the days it owned the property, and it is the closing calculation licensing exams reach for most often.
The multiplication is trivial. What decides the item is the setup: whether the jurisdiction bills before or after the period, which day-count convention the problem specifies, and which party ends up debited.
Settle the Setup Before You Calculate
First, establish the direction of billing. Where taxes are billed in arrears, the bill arrives after the period it covers, so at closing the seller owes for days already used and the money has not been paid yet. Where taxes are billed in advance, the seller has already paid for a period extending past the closing date and is owed a refund of the unused part.
Second, fix the period the bill covers and count the seller's days inside it. The seller's share runs from the first day of the tax period through the last day the seller is responsible, which is the day before closing or the closing day itself depending on what the contract says. Exam items normally state this, and when they do not, the phrasing usually tells you which day was intended.
Third, choose the divisor the problem specifies. A 365-day year uses actual calendar days and actual month lengths. The 360-day convention, often called the banker's or statutory year, treats every month as thirty days, which keeps the arithmetic clean and is still used in parts of the country. The two produce different answers, so never substitute one for the other.
Only then do the arithmetic: divide the annual or installment amount by the day count to get a daily rate, multiply by the number of days on one side, and check that the two shares add back to the original bill.
Assigning Debits and Credits
The calculation gives you an amount. The billing direction gives you the entry. Reverse them and a correct amount still scores as a wrong answer.
Billed in arrears, bill unpaid at closing. The buyer will pay the whole bill later, so the seller's share is a debit to the seller and a credit to the buyer of the same amount.
Billed in advance, seller already paid. The buyer occupies days the seller funded, so the unused portion is a credit to the seller and a debit to the buyer.
Billed in arrears but already paid for the prior period. That closed period is settled and is not prorated. Only the current unpaid period is split.
Paid in installments. Prorate against the installment period the closing falls inside, not the annual figure, and confirm which installments have actually been paid.
Debits and credits mirror each other. Any prorated amount appears once on each settlement statement, on opposite sides, and in the same amount.
The two shares reconcile. Seller's share plus buyer's share equals the bill being prorated. Run that check before selecting an answer, because it catches most day-count errors.
Estimated bills. When the current amount is not yet issued, closings commonly prorate on the most recent figure and may provide for a later adjustment. An exam item will supply whatever figure it wants used.
Three Worked Practice Items
Original items with illustrative numbers. Set up the direction of billing and the day count first, then calculate.
Question 1
Taxes are billed in arrears for the calendar year and total $2,920 for a non-leap year. Closing is May 1 and the seller is responsible through April 30. Use a 365-day year. What is the entry?
A debit to the seller and a credit to the buyer of $960. The daily rate is $2,920 / 365 = $8. January through April is 31 + 28 + 31 + 30 = 120 days, and 120 x $8 = $960. The bill is unpaid, so the buyer receives the seller's share as a credit and pays the full bill when it is issued.
Question 2
Taxes of $3,600 for the calendar year were paid in advance on January 1. Closing is September 1 with the seller responsible through August 31. Use the 360-day convention. What is the entry?
A credit to the seller and a debit to the buyer of $1,200. At 360 days the daily rate is $3,600 / 360 = $10. Eight thirty-day months give the seller 240 days, or $2,400 used, leaving $3,600 - $2,400 = $1,200 of prepaid tax covering days the buyer will own.
Question 3
Taxes are billed in two equal advance installments of $1,800. The second installment, covering July 1 through December 31, was paid on July 1. Closing is October 1 and the seller is responsible through September 30. Use actual days. What is the entry?
A credit to the seller and a debit to the buyer of $900. The installment period runs 31 + 31 + 30 + 31 + 30 + 31 = 184 days. The seller used July through September, which is 31 + 31 + 30 = 92 days, exactly half, so $900 is used and $900 is unused. The first installment is not prorated because its period closed before the sale.
How These Items Are Written to Trip You
The most common trap is a correct amount attached to the wrong party. An item will describe arrears billing and then offer the seller's share as both a debit and a credit among the choices. Decide the direction of billing before you look at the answers, because after the arithmetic the two options look equally plausible.
The second is a prorated figure computed on the wrong period. Where a bill is paid in installments, the split runs against the installment that includes the closing date. Applying the annual figure produces an answer roughly double the correct one, which is usually sitting in the answer list.
The third is the day count. February, leap years and the difference between counting through the closing day and counting through the day before all shift the total by a day or two. A one-day error produces a near miss, and near misses are deliberately placed among the distractors.
Work these problems in the same order every time and the traps stop functioning: direction, period, day count, daily rate, days, amount, entry. RE License Prep drills them in that sequence, your PassPulse Score isolates closing math from the rest of your results, and your PassMap™ moves it up the queue when the scores say it is costing you. Full access is $79 one time, with immediate access at checkout and a 30-day money-back guarantee.
Questions About Tax Proration
How do I know whether to use 365 days or 360?
The item tells you, and when it does not, the phrasing of the figures usually signals it. Actual dates and month lengths point to a 365-day year, while references to a statutory or banker's year point to 360. Outside the exam, the contract and local custom decide.
Which side gets the closing day?
It depends on the contract and on local practice, and jurisdictions differ. Exam items generally state the responsibility explicitly, so read that sentence carefully rather than applying a default, and in practice read the proration clause in the purchase agreement.
Is arrears billing more common?
Billing after the covered period is the arrangement most jurisdictions use, but advance billing exists and some places collect in installments spanning a fiscal year rather than a calendar year. Confirm the schedule where the property sits instead of assuming.
What happens if the current bill has not been issued?
Closings commonly prorate on the most recent available figure, and the contract may require the parties to settle any difference once the actual bill arrives. An exam item will supply the figure it wants you to use, so do not add an adjustment it did not mention.
Do other closing figures prorate the same way?
The method carries over to anything paid for a period, including rent on an occupied property, homeowners association dues, municipal service charges and fuel left in a tank. The direction of the entry still depends on whether the item was prepaid or is owed.
Is proration part of the state portion or the general portion?
Calculation items usually sit in the general portion, but a state portion can test the convention your jurisdiction customarily uses or a local tax rule. Check your candidate handbook's content outline to see where closing math is weighted for your exam.
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