Real estate tax proration is the closing-day split of the property tax bill between buyer and seller, so each side pays only for the days they actually owned the home. The closing agent works out a per-day tax figure, counts the days each party held title during the current tax period, and posts the result as a credit on the settlement statement. Which direction the money moves depends on whether your local taxes are billed in advance or in arrears.
Advance Billing Versus Arrears Decides Who Credits Whom
The single biggest variable is when your taxing authority collects. Taxes paid in advance are billed at the start of the period they cover. Taxes paid in arrears are billed after the period has already run. Most jurisdictions in the country bill in arrears, but advance billing exists in some areas.
If the seller already paid a full year in advance, they’ve overpaid for the stretch after closing, and the buyer reimburses them for those remaining days. If taxes are billed in arrears, the seller has lived in the home for part of the year without yet paying a bill, so the seller credits the buyer, who will pay the full bill when it eventually arrives.
The tax year matters too. Some jurisdictions run on a calendar year starting January 1; others use a fiscal year, such as one that begins July 1. Your closing agent needs both the billing method and the tax year dates before running any numbers.
What the Closing Agent Needs to Run the Numbers
Four pieces of information drive every proration:
- The most recent annual tax bill, usually available from the county assessor or municipal treasurer.
- The closing date. The seller is responsible through the day before closing; the buyer picks up the tab starting on the closing date itself.1Internal Revenue Service. Publication 530 (2025), Tax Information for Homeowners
- The tax year and billing cycle: calendar or fiscal, advance or arrears.
- The seller’s payment history, so nothing gets double-billed and no stretch of the year is missed.
How the Daily Rate Is Calculated
Proration math reduces to a daily rate multiplied by days of ownership. Two conventions are standard:
- The 365-day method divides the annual bill by 365 (366 in a leap year) for a precise calendar-based daily figure.
- The 360-day method treats every month as exactly 30 days and divides by 360. It’s common in lending and in some regional closing customs, and it produces a slightly higher daily rate.
Which one applies is usually set by local custom or by the purchase contract. Check before closing day, because on an expensive property the gap adds up.
A Worked Example
Suppose the annual tax bill is $3,650 and the seller owned the home for 100 days of the current tax year. Under the 365-day method the daily rate is $10.00, so the seller’s share is $1,000. Under the 360-day method the daily rate rises to about $10.14, and the seller’s share becomes $1,014. On a $3,650 bill the difference is modest. On a $12,000 bill the same scenario would produce a gap of roughly $47.
When taxes are billed in arrears, that seller share posts as a credit to the buyer and a charge to the seller. When taxes are billed in advance and the seller has already paid the full year, it’s the buyer who owes the seller for the days after closing.
Where Proration Shows Up on Your Settlement Statement
For most residential purchases with a standard mortgage, the proration appears on the Closing Disclosure, which replaced the HUD-1 Settlement Statement for the majority of mortgage transactions in October 2015. Reverse mortgages and certain other loan types still use the HUD-1.
Federal regulations require the Closing Disclosure to break tax prorations into two categories. Taxes the seller already paid in advance sit under “Adjustments for Items Paid by Seller in Advance,” with separate lines for city or town taxes, county taxes, and assessments; the buyer reimburses the seller for the post-closing portion. Taxes the seller owes but hasn’t yet paid sit under “Adjustments for Items Unpaid by Seller,” again broken out by city, county, and assessments, with the seller crediting the buyer.2eCFR. 12 CFR 1026.38 – Content of Disclosures for Certain Mortgage Transactions
On a HUD-1, the same idea uses different line numbers: lines 106 through 112 for items the seller paid in advance, and lines 210 through 219 for items the seller hasn’t yet paid.3Consumer Financial Protection Bureau. 12 CFR Part 1024 – Appendix A to Part 1024 – Instructions for Completing HUD-1 and HUD-1a Settlement Statements Look at both the buyer’s and seller’s columns and confirm the credits and debits match. A clerical error here changes your cash to close directly.
When the Proration Is Based on an Estimate
This is where most post-closing disputes come from. If the current year’s tax bill hasn’t been issued yet, the closing agent estimates the proration using the prior year’s bill or the most recent assessment. That estimate can miss by a lot, especially after a reassessment, after improvements, or when local rates change.
Many purchase contracts handle this with a reproration agreement. Once the real bill arrives, the parties recalculate. If the seller’s share turns out to be higher than the estimate, the seller owes the buyer the difference. If the actual bill came in lower, the buyer refunds the overage. Without such a clause, whoever got the short end has no clean way to recover after closing. The reproration window is set in the agreement itself, often 12 to 18 months after closing or a set number of days after the actual bill issues.
New construction is the classic trap. The current assessment may reflect only the land, because the finished structure hasn’t been assessed yet, so the bill used at closing is artificially low. When the assessor catches up, the real bill can be substantially higher. A reproration clause matters most in this scenario.
If your contract doesn’t already contain one and your closing will use an estimate, ask your attorney or closing agent to add it.
What Each Side Can Deduct
The IRS treats prorated property taxes as if each party paid their own share, regardless of who actually cut the check at closing and regardless of how local law assigns the tax lien. The seller can deduct the taxes allocable to the period up to but not including the closing date; the buyer can deduct from the closing date forward.1Internal Revenue Service. Publication 530 (2025), Tax Information for Homeowners
Both deductions require itemizing, and both fall inside the federal cap on state and local tax (SALT) deductions. For 2026, the SALT cap is $40,400 for most filers and $20,200 for married individuals filing separately.4Office of the Law Revision Counsel. 26 U.S. Code 164 – Taxes Property taxes, state income taxes, and local taxes all share that single ceiling, so in a high-tax area some or all of your prorated share may produce no additional federal benefit.
The proration breakdown on the Closing Disclosure is your documentation of each party’s share for filing.1Internal Revenue Service. Publication 530 (2025), Tax Information for Homeowners Keep a copy with your tax records for the year of the sale.
Don’t Confuse the Proration With Your Escrow Deposit
If you’re financing, your lender will almost certainly require an escrow account for taxes and insurance. Your proration credit doesn’t flow into that account. It reduces your cash due at closing. The lender then collects its initial escrow deposit, usually a few months of estimated taxes, as a separate closing cost.
That means you’ll see two tax-related items on your Closing Disclosure with different jobs. The proration settles the split between you and the seller. The escrow prefunding gives your lender a cushion to pay the next bill on your behalf. They appear in different sections of the form, so read carefully before signing.