Property Tax Proration
Also known as: Tax Proration, Tax Adjustment
The division of property taxes between the buyer and seller based on the closing date. Each party pays their share of the annual tax based on how many days they owned the property during the tax period.
Detailed Explanation
Property taxes are typically assessed annually but paid in installments. When a home is sold, the taxes for the current period are divided between the buyer and seller based on the closing date.
In new construction, property tax proration can be complicated because the land may have been assessed at a lower value (vacant land) before the home was built. Once the home is complete and reassessed, taxes can increase significantly.
Buyers of new construction should budget for a potential increase in property taxes once the completed home is reassessed — this can be a significant surprise in the first full year of ownership.
In Your Contract
Look for "tax proration," "property tax adjustment," or "real estate tax allocation" provisions in the closing section of your contract.
Key Points
- 1Divides property taxes between buyer and seller based on closing date.
- 2New construction homes may be reassessed at higher values after completion.
- 3Budget for potential tax increases in your first full year of ownership.
- 4Tax proration appears on your Closing Disclosure.
- 5The current assessment may reflect vacant land, not the completed home.
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