Prorated taxes at closing are the property tax bill split between buyer and seller based on how many days each one owns the home during the tax year. The closing agent works out a daily rate from the annual bill, counts the days each party held the property, and puts a matching credit and debit on the Closing Disclosure. Neither side ends up paying for the other’s time as owner.
How the Split Is Calculated
A property tax bill covers a full year, but closings happen on ordinary weekdays in the middle of that year. Proration converts the annual bill into a per-day cost and assigns each party only their share. The tax year might run January 1 through December 31, or it might follow a fiscal year like July 1 through June 30. That depends on the local taxing authority.
Two details drive the numbers. The first is who owns the day of closing. Federal tax law treats the buyer as the owner starting on the date of sale, which means the seller is responsible for every day up to but not including that date.1Office of the Law Revision Counsel. 26 USC 164 – Taxes Most purchase contracts follow the same convention, though a contract can assign the closing day differently for settlement-credit purposes. If the contract is silent, the federal rule controls for tax-deduction purposes.
The second is whether taxes are paid in arrears or in advance. In most of the country, taxes are paid in arrears: the bill for the current year doesn’t come due until later in the year or even the following year. The seller hasn’t yet written a check for the period they lived in the home, so the proration takes the form of a credit from seller to buyer. Less often, the seller has already prepaid taxes that cover a period past closing, and the buyer reimburses the seller for those future days.
A Worked Example
You need three numbers: the annual tax bill, the number of days in the tax year, and the number of days the seller owned the property during that year.
Start with the daily rate. Divide the annual bill by the days in the tax year. An annual bill of $4,380 over a 365-day tax year comes to $12.00 per day.
Then count the seller’s days, from the first day of the tax year through the day before closing. If the tax year begins January 1 and closing lands on June 1, the seller owned the property for 151 days.
Multiply. 151 days at $12.00 per day is a seller share of $1,812. The buyer’s share covers the remaining 214 days, or $2,568.
What the Credit Looks Like on the Closing Table
When taxes are paid in arrears, the seller gives the buyer a credit for the seller’s share. Using the numbers above, the seller’s side of the Closing Disclosure shows a $1,812 debit that reduces proceeds, and the buyer’s side shows a $1,812 credit that reduces cash due at closing. The buyer now holds the seller’s contribution and pays the full annual tax bill when it comes due. The credit is not a discount on taxes. It is the seller pre-funding their share so the buyer writes one check to the county later.
When taxes were paid in advance, the money flows the other way. If the seller paid the entire $4,380 before closing on June 1, the buyer owes the seller for the remaining 214 days. The buyer’s Closing Disclosure shows a $2,568 debit added to cash due, and the seller’s shows a $2,568 credit. The buyer’s out-of-pocket cost at closing goes up by that amount, but the buyer won’t owe the taxing authority anything else for the rest of that tax year.
Where to Find It on the Closing Disclosure
Tax prorations appear on page 3 of the Closing Disclosure in the Summaries of Transactions table. Taxes paid in advance by the seller show up under “Adjustments for Items Paid by the Seller in Advance.” Taxes owed in arrears show up under “Adjustments for Items Unpaid by Seller.”2Consumer Financial Protection Bureau. 12 CFR 1026.38 – Content of Disclosures for Certain Mortgage Transactions Each line shows the dollar amount and the date range it covers, so you can check the math by counting the days and multiplying by the daily rate.
When the Current Tax Bill Isn’t Out Yet
Closings often happen before the current year’s tax bill has been issued. The closing agent estimates the proration using the most recent information available, usually the prior year’s bill. That’s reasonable when assessments and rates have been steady, but it creates a risk: if the new bill lands higher or lower than the estimate, one side overpaid and the other underpaid.
Some purchase contracts include a re-proration clause for exactly this situation. The parties agree to revisit the numbers once the real bill arrives and settle up the difference. If the actual bill is higher than the estimate, the seller sends the buyer a check for the shortfall. If it’s lower, the buyer refunds the overage. Without a re-proration clause, whatever appeared on the Closing Disclosure at settlement is usually final, even if it turns out to be off. This matters more in areas where assessed values or tax rates have been moving.
New construction is its own trap. The bill used at closing may reflect only the vacant land, not the completed home. The buyer can end up owing significantly more once the assessor catches up. Ask the closing agent how the proration will be handled and whether a re-proration clause makes sense.
What Proration Means for Your Federal Deduction
The IRS doesn’t care what the closing table credits say. For federal income tax purposes, the seller is treated as paying property taxes for the portion of the year ending the day before the sale, and the buyer is treated as paying taxes starting on the date of sale.3Internal Revenue Service. Publication 530 – Tax Information for Homeowners This split applies automatically, regardless of how the money actually moved at settlement.1Office of the Law Revision Counsel. 26 USC 164 – Taxes
Both parties can deduct their respective shares in the year of sale, but only if they itemize. If you close on September 1, the seller deducts January 1 through August 31 and you deduct September 1 through December 31, even if only one of you wrote a check to the county.
Keep the SALT cap in mind. For 2026, the federal cap on the combined deduction for state and local taxes, including property taxes, is $40,400 for most filers and $20,200 for married taxpayers filing separately. If your state income taxes, local taxes, and property taxes already push against that ceiling, the prorated property tax deduction may not add much.
Escrow Is a Separate Bucket
Buyers with a mortgage regularly confuse the proration credit with their escrow deposit. The two are unrelated obligations. The proration credit reimburses you for the seller’s share of taxes. The escrow deposit is money your lender collects upfront to start funding the account that will pay future tax bills on your behalf.
Federal law limits what a lender can collect. At closing, the servicer can take enough to cover taxes attributable to the period between the last payment and your first mortgage payment, plus a cushion of no more than one-sixth of the estimated annual escrow disbursements.4eCFR. 12 CFR 1024.17 – Escrow Accounts From there, your monthly mortgage payment includes roughly one-twelfth of the annual tax and insurance cost.
The seller’s proration credit does not flow into your escrow account. It reduces your cash due at closing, but you still fund the escrow separately. Buyers who assume the credit covers the escrow are sometimes surprised when the lender collects several additional months of taxes at the closing table.
Exemptions and Supplemental Bills That Catch Buyers Off Guard
If the seller claimed a homestead exemption or another property tax break, the proration at closing reflects the reduced bill. Once the home changes hands, that exemption usually ends. The buyer may qualify for their own exemption, but there’s often a lag before it takes effect, and the first full tax bill after closing can come in noticeably higher than the proration math suggested. If you’re buying a home where the seller had an exemption you won’t immediately qualify for, budget for the full unexempted bill.
Some states also issue supplemental tax bills after a change of ownership. A supplemental bill captures the difference between the old assessed value and the new value triggered by the sale. These arrive months after closing and are the buyer’s responsibility. They aren’t covered by the proration credit because they didn’t exist when the closing numbers were run.
Other Items Prorated the Same Way
Property taxes get the most attention, but any recurring expense that spans the closing date gets the same treatment. The closing agent calculates a daily rate and charges each party for their days of ownership during the billing cycle.
- HOA and condo fees are usually paid in advance, so the buyer typically reimburses the seller for prepaid days past closing.
- Special assessments for infrastructure like sewer upgrades or road work may be prorated or assigned entirely to one party, depending on the contract.
- Water and sewer charges covering a period that straddles the closing date are split the same way as taxes.
- Heating fuel left in an oil or propane tank is reimbursed based on a gauge reading and the current price per gallon.
- Rent on an investment property is split between the seller for days before closing and the buyer for days after.
Each of these appears on the Closing Disclosure with its own line item and date range. Reviewing them before signing is worth the time. Small errors in day counts or daily rates add up faster than you’d expect.