Closing credit or debit that allocates a property-tax period between buyer and seller according to ownership timing.
A tax proration is a closing credit or debit that allocates a property-tax period between buyer and seller according to the time each party owns the property.
The direction of the adjustment depends on whether the applicable tax has already been paid, will be billed later, and which party is expected to pay the taxing authority after closing.
Property-tax billing periods rarely begin and end on the closing date. Proration prevents the buyer from bearing the seller’s full pre-closing share or the seller from paying for the buyer’s post-closing ownership period.
The adjustment can materially change Cash to Close and seller proceeds. It can also look counterintuitive: a buyer may receive a seller credit for unpaid taxes at closing and still be responsible for paying the full bill later when it comes due.
Proration does not guarantee the estimate will equal the final tax bill. Settlement may use the most recent bill, an estimated future bill, a contractual rate, or a local calculation convention. A reassessment or corrected bill after closing can create a different amount.
Borrowers encounter tax proration on closing worksheets and the Closing Disclosure, often under adjustments for items paid or unpaid by the seller. The settlement agent applies the purchase contract and local closing practice.
The exact day-count convention matters. Depending on the contract and jurisdiction, the closing date may be assigned to the buyer or seller, and a 365-day, 366-day, monthly, or other local method may be used.
When an annual bill and day-count method are used, the allocation can be represented as:
This formula explains the arithmetic, but the purchase contract and settlement instructions control which dates and tax amount enter the calculation.
| Item | Purpose | Who ultimately receives the money? |
|---|---|---|
| Tax proration | Allocates buyer-seller responsibility | Usually an adjustment between buyer and seller |
| Prepaid Property Taxes | Pays taxes due at or near closing | Taxing authority |
| Initial Escrow Deposit | Seeds the mortgage escrow account | Mortgage servicer’s escrow account |
| Property Tax Escrow | Collects for future tax disbursements | Servicer, then taxing authority |
An annual property-tax bill is estimated at $7,300, or $20 per day using a 365-day convention. The settlement instructions assign 100 days of the tax period to the seller, and the bill has not yet been paid.
The seller’s share is $2,000. The buyer receives a $2,000 credit at closing and later pays the full tax bill when due, directly or through escrow. The credit allocates responsibility; it is not a payment already sent to the tax collector.
Tax proration differs from Property Taxes because property taxes are the government obligation, while proration is a private closing allocation between transaction parties.
It differs from Prepaid Property Taxes because prepaid taxes are collected because of billing timing, while a tax proration allocates responsibility between buyer and seller.
It differs from Initial Escrow Deposit because escrow funding prepares the new account for future bills. A proration settles buyer-seller responsibility for a period that crosses closing.
It also differs from Prorations because prorations is the broader category that can include taxes, association dues, rent, fuel, or other time-based items.