Proration
Proration is the process of dividing expenses and income proportionally between buyers and sellers based on the portion of time each party owns the property during a billing period. Common prorated items include property taxes, homeowners association dues, utility bills, insurance premiums, and rental income, calculated based on the number of days each party is responsible for the property. This ensures that each party pays only their fair share of ongoing expenses relative to their period of ownership.
Example
“At closing, the property taxes were prorated so the seller paid for January through June 15th, and the buyer was responsible from June 16th forward.”
Memory Tip
Think 'pro-portion' - proration splits costs proportionally between parties based on their time of ownership.
Why It Matters
Proration ensures you only pay for expenses during the time you actually own the property, preventing you from paying the full year's property taxes when you buy in June or losing money on prepaid expenses when you sell. Understanding prorations helps you accurately estimate your closing costs and cash requirements.
Common Misconception
Many buyers and sellers think they're responsible for full billing periods of expenses, but proration divides these costs fairly based on actual ownership dates.
In Practice
You close on your home purchase on April 15th, and the seller had already paid the full year's $3,600 property tax bill in January, so you owe the seller a prorated credit of $2,700 for the 9.5 months remaining in the tax year. This proration amount is typically handled through closing cost adjustments rather than separate payments between parties.
Etymology
From Latin 'pro rata' meaning 'according to the rate,' referring to the mathematical division of costs proportionally based on time periods.
Common Misspellings
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