What Is Prorations?
Prorations divide costs by ownership. Property tax is often paid in advance—the seller may have paid the full year. At closing, the buyer gets a credit for the portion covering days they'll own the property. Rent works the opposite way: if the seller collected March rent and you close March 15, you get a credit for the rent from March 16–31. HOA dues, utilities, and other periodic expenses are prorated the same way. The settlement statement shows each proration—who's debited and who's credited. Prorations ensure fairness: you don't pay for time you didn't own the property, and the seller doesn't keep rent for time you'll own it. Review the settlement statement before closing—proration errors are common.
Prorations are costs split between buyer and seller based on the day of ownership—each party pays their share of property tax, rent, HOA fees, or other periodic expenses.
At a Glance
- What it is: Costs split between buyer and seller by day of ownership.
- Why it matters: Ensures each party pays only for their period. Affects cash at closing.
- Key detail: Property tax and rent are the most common prorations.
- Related: Settlement statement, closing costs, property tax, escrow.
- Watch for: Proration errors—verify the math. Wrong dates or amounts can cost you hundreds.
How It Works
Property tax. Property tax is usually paid in arrears (after the year) or in advance, depending on the jurisdiction. If the seller paid the full year and you're buying mid-year, you owe your share. The settlement statement shows: seller credit (they paid for your days), buyer debit (you reimburse them). Or the reverse if taxes are paid in arrears—seller owes for days they owned; buyer gets a credit.
Rent. For investment properties, rent is often prorated. If the seller collected March rent ($1,200) and you close March 15, you get a credit for $600 (half the month). The seller keeps $600 for March 1–14. The settlement statement shows the split.
HOA dues. If the seller paid the month's HOA fee and you close mid-month, you reimburse them for your share. Or the HOA is paid in arrears—seller owes for their days; you get a credit.
Calculation. Prorations use a daily rate: annual amount ÷ 365 (or 360 in some contracts). Multiply by the number of days each party owns. The settlement statement shows the math.
Real-World Example
San Antonio 3-bed, $248,000. Closing March 18.
Property tax: Annual property tax $4,200. Seller paid it in January. You own from March 18–Dec 31 = 289 days. Your share: $4,200 × (289/365) = $3,325. Seller credit to you: $3,325. You're debited $3,325—you reimburse the seller for the portion of the year you'll own.
Rent: Tenant pays $1,400/month. Seller collected March rent. You own from March 18–31 = 14 days. Your share: $1,400 × (14/31) = $632. Seller credit to you: $632. You get $632—the seller had collected rent for days you'll own.
Settlement statement: Shows both prorations. Your cash to close is reduced by the rent credit and increased by the tax debit. Net effect: you pay $2,693 more (tax minus rent credit) at closing.
Pros & Cons
- Fair—each party pays only for their period.
- Standard at every closing—the settlement statement shows them.
- Property tax and rent prorations are predictable.
- Reduces disputes—the math is clear.
- Errors happen—wrong dates, wrong amounts, wrong daily rate.
- Some contracts use 360 days, others 365—affects the math.
- Review the settlement statement before closing.
Watch Out
- Execution risk: Verify prorations on the settlement statement. Check the dates, the annual amounts, and the daily rate. Errors can cost you hundreds.
- Compliance risk: Proration methods vary by contract and local custom. Some use 30-day months for rent; others use actual days. Know what your contract says.
- Modeling risk: Prorations affect cash to close. A large property tax proration can add $2,000–$4,000 to what you bring. Budget for it.
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The Takeaway
Prorations split costs by day of ownership—property tax, rent, HOA. The settlement statement shows who's debited and who's credited. Review the math before closing. Errors are common—verify dates and amounts.