Tax proration is the method used at a real estate closing to divide a property’s annual tax bill between the seller and the buyer according to how many days each one owns the home during the tax year. Federal law draws the line at closing day itself: under 26 U.S.C. § 164(d), the seller is responsible for every day up to but not including the sale date, and the buyer picks up from the sale date forward.1Office of the Law Revision Counsel. 26 USC 164 – Taxes That split shows up twice in your paperwork: once as a credit or charge on the Closing Disclosure, and again on each party’s federal income tax return, where each side deducts only their share.
How the Split Is Calculated
Property taxes accrue daily even though they arrive as a lump sum once or twice a year. Proration converts that annual figure into a daily rate, then multiplies by each party’s ownership days. Two conventions are used for the daily rate, and the purchase contract or local custom decides which one applies.
Calendar Year Method
This method divides the annual tax bill by 365. On a $5,475 annual bill, each day costs $15. If the seller owned the property for 200 days of the tax year, the seller’s share is $3,000 and the buyer’s share is $2,475.
Banker’s Year Method
This method treats every month as 30 days, producing a 360-day year. The same $5,475 bill divided by 360 gives a daily rate of $15.21. For that same 200-day seller period, the seller’s share becomes $3,042 and the buyer’s share is $2,433. The difference is small on modest bills and larger on expensive homes with heavy tax bills. If your contract doesn’t specify a method, ask before signing; buyer and seller assuming different conventions is a common source of closing-table disputes.
Arrears Billing Versus Advance Billing
The direction of the credit at closing depends on whether local taxes are billed after the period they cover or before it. Getting this backwards flips the math.
Taxes Billed in Arrears
In arrears jurisdictions, the tax bill arrives after the period it covers. A seller who closes in June has occupied the home for months but hasn’t been billed for that time yet. At closing, the seller gives the buyer a credit for the accrued but unpaid taxes, and the buyer uses that credit to pay the full bill when it later comes due. This is the more common arrangement, and it is where a low credit quietly leaves the buyer subsidizing the seller.
Taxes Billed in Advance
In advance jurisdictions, the seller may have paid the entire year’s taxes before closing. A seller who paid through December but closes in August is owed reimbursement for September through December. That reimbursement shows up as a charge to the buyer and a credit to the seller on the settlement statement.
What You Need to Run the Numbers
Four inputs drive the calculation, and each is worth confirming before signing:
- The annual tax amount, from the most recent bill or the county assessor. If the current year’s bill hasn’t been issued, the prior year’s bill is typically used as an estimate.
- The local fiscal year. Not every jurisdiction runs January through December; some use July through June, and others assess on different schedules entirely.
- Payment status. Whether the seller has paid the current bill in full, paid one installment, or paid nothing determines which direction the credit flows.
- The exact closing date, which sets the day-count boundary.
The title or escrow company usually runs the calculation, but knowing the inputs lets you catch errors before you sign.
Where Proration Shows Up at Closing
Prorated taxes appear on Page 3 of the Closing Disclosure in the adjustments section. When taxes are billed in arrears, the seller’s share appears under “Adjustments for Items Unpaid by Seller,” reflecting the credit passed to the buyer for accrued but unpaid taxes.2Consumer Financial Protection Bureau. Closing Disclosure Explainer When taxes are prepaid, the buyer’s reimbursement to the seller shows up in the corresponding line. The most common error is using the wrong annual tax figure, particularly when the current year’s bill hasn’t come out and both sides are working from an estimate. If the numbers don’t match your expectation, ask the closing agent to walk you through the calculation.
One caution about the purchase contract: it can override the federal default for the closing-day credit itself. Some contracts assign closing day to the seller, some to the buyer, some split it. Whatever the contract says controls the settlement adjustment. For the income tax deduction discussed below, though, the federal rule always applies, and the buyer owns the closing date.
Escrow Funding Is Separate
If you’re financing the purchase, your lender will require an escrow account for taxes and insurance, and you’ll fund it at closing. Under RESPA, the lender can collect enough to cover taxes accrued since the last payment plus a cushion of no more than one-sixth of the estimated annual disbursements, which works out to roughly two months of tax and insurance payments.3eCFR. 12 CFR 1024.17 – Escrow Accounts Some states cap the cushion lower. This escrow deposit is separate from the proration credit and adds to your cash to close.
When the Closing Estimate Turns Out Wrong
Closings often happen before the current year’s tax bill has been issued, so the proration is based on the prior year’s figure. A re-proration agreement commits both parties to settle up once the actual bill lands. If the real bill is higher than the estimate, the seller owes the buyer the difference for the seller’s ownership days; if it’s lower, the buyer returns the excess. Whether a re-proration clause appears in your contract depends on local practice. In jurisdictions where taxes are billed well after they accrue, insisting on one is worth the effort. Without it, you live with whatever estimate was used, even if it was significantly off.
Supplemental Bills Are Not Covered
Many jurisdictions reassess a property when it changes hands. If the reassessed value exceeds the value the seller was paying on, the taxing authority issues a supplemental bill covering the difference for the remainder of the tax year. Supplemental bills are the buyer’s responsibility. They aren’t handled by the closing proration credit or by a re-proration agreement. In areas where values have risen sharply since the last assessment, budget for one in the months after you close.
How Proration Affects Your Income Tax Return
The IRS treats the buyer and seller as each having paid their own prorated share of the year’s property taxes, even if one party wrote the check for the whole bill. If you itemize, you deduct only your share: the seller deducts taxes for the days before the sale, and the buyer deducts from the sale date forward.4Internal Revenue Service. Publication 530, Tax Information for Homeowners This allocation applies regardless of how local law assigns the underlying tax liability.1Office of the Law Revision Counsel. 26 USC 164 – Taxes
When Payments Don’t Match the Split
Sometimes the closing arithmetic doesn’t produce a clean match with actual payments. If the buyer ends up paying part of the seller’s share without reimbursement, the buyer can’t deduct that amount as taxes; instead it’s added to the home’s cost basis. If the seller pays part of the buyer’s share, the buyer can still deduct those taxes but must reduce basis by the same amount.4Internal Revenue Service. Publication 530, Tax Information for Homeowners These basis adjustments matter when you later sell the home, so keep the Closing Disclosure and settlement records.
The SALT Cap
For 2026, the federal cap on the state and local tax deduction is $40,400 for most filers. Property taxes, state income taxes, and local taxes all count against that single cap. On an expensive home in a high-income-tax state, your prorated property tax deduction may be partly or fully absorbed by the limit. The proration calculation at closing doesn’t change, but the tax benefit you actually receive from it may be smaller than the deduction on paper suggests.