Prorate
Definition and meaning of Prorate in real estate.
To prorate is to divide and allocate ongoing property expenses, such as taxes and utility fees, proportionally between the buyer and seller at closing based on their respective days of ownership.
In more detail
During a real estate transaction, expenses that are billed periodically must be split fairly so that each party only pays for the days they actually occupy the property. For example, if a seller paid the property taxes for the entire year in advance, the buyer will credit the seller for the days remaining in the year.
Conversely, if taxes are paid in arrears, the seller will credit the buyer for the portion of the year the seller owned the home. These calculations are performed by the closing agent and are detailed on the closing disclosure statement.
Key facts
| Category | Legal, Titles & Closing |
|---|---|
| Calculated by | Settlement or closing agent |
| Applies to | Taxes, HOA dues, and utilities |
| Shown on | Closing Disclosure |
Because the seller occupied the home for the first portion of the year, the closing agent prorates the annual property tax bill, charging the seller for their days of occupancy and the buyer for the remaining days.
Frequently asked questions
What does it mean to pay property taxes in arrears?
Paying in arrears means the taxes are paid at the end of the tax period rather than the beginning, requiring the seller to credit the buyer for unpaid taxes accumulated during their ownership.
How is a daily rate determined for proration?
The closing agent divides the annual or monthly expense by the number of days in the year or month, then multiplies that daily rate by the number of days of ownership.