Basics of Tax Prorations for a Residential Sale

Alicia Schaub

Through proration, each party pays for their share of the property taxes in accordance with their possession of the property. But it can get a little confusing! So, here are the basics of prorating:

There are two methods of tax prorating that everyone should know: prorating taxes paid in advance and prorating taxes paid in arrears.

Paid in Advance:

If the taxes are billed in advance, the seller will receive a credit for the number of days that the buyer will be in possession of the property for which the seller has prepaid for.
First, you will want to determine the daily tax rate by dividing the amount of the most recent tax bill by the number of days in the tax period.
Second, multiply that daily tax rate by the number of days that the buyer will be in possession, starting with the closing date and ending with the last day of the tax period).
This amount will be the amount the buyer will credit the seller at closing, as it acts as reimbursement for the days the seller has already paid for.

Paid in Arrears:

If the taxes are billed in arrears, the buyer will be receiving the credit for the number of days that the seller was in possession of the property. This happens because the buyer will be paying for the taxes.
Here, you must acknowledge that you may not know the amount of the tax bill for the current tax period. So, you may need to use the most recent tax bill as an estimate for the next bill.
The rest of the process is the same – determine the daily tax rate and multiply that by the number of days that the seller was in possession of the property and for which the buyer will be paying at the next due date. This amount will be credited to the buyer at closing.

“Levy Date”

This is the date when the taxes are due and pays a vital role in determining the tax period. For example, the most common would be the summer taxes being levied on July 1 and the winter taxes levied on December 1.

Purchase Agreement

The purchase agreement should ALWAYS provide the method of tax proration to be used. If the purchase agreement does not state so, then the statutory method would apply.

MCL 211.2(4) provides:

“In a real estate transaction between private parties in the absence of an agreement to the contrary, the seller is responsible for that portion of the annual taxes levied during the 12 months immediately preceding, but not including, the day title passes, from the levy date or dates to, but not including, the day title passes and the buyer is responsible for the remainder of the annual taxes. As used in this subsection, “levy date” means the day on which a general property tax becomes due and payable.”

When in doubt of which prorating method applies, look to the purchase agreement.

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