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How do real estate tax prorations work?

Proration is defined as the act of dividing property taxes, interest, insurance premiums, rental income, etc., between buyer and seller proportionately to time of use or the date of closing.

In a typical sale/purchase closing, the item most routinely prorated is the ad valorem taxes for that year. Since ad valorem taxes are paid at the end of the year in which they are due (they can be paid as early as October 1 or as late as January 31 of the next calendar year without penalty in most Texas counties), any closing taking place before October 1 will generally show a charge to the seller from January 1 to the closing date and a credit to the buyer for the same period.

Unless negotiated otherwise, this allows the seller to pay taxes for the time that he or she actually had ownership, use and enjoyment of the property.

Around October 1, tax notices will be sent to the new owners for the year. They will be expected to pay taxes (usually through their mortgage company escrow account) for the full year. Taking into account the credit that they received at closing, the new owners actually pay taxes only for the time during which they had ownership, use and enjoyment of the property.

Title companies use the best information available when prorating taxes prior to October 1 (when official figures are released by the tax authorities). This best-available information is usually the tax amount paid for the prior year.

In closings that occur after official tax figures are released (generally October 1), title companies will normally charge each party their pro rata tax amount and pay the taxing authorities directly. This allows title companies to ensure that taxes have been paid when issuing their mortgagee title policies.


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