In Texas, property taxes are assessed and paid in arrears — the 2025 tax bill is paid in 2025, but it is not finalized and sent until fall, with a January 31 deadline. At closing, neither the exact tax bill nor the exact closing date amount are perfectly predictable, so the parties use prior-year taxes as an estimate and prorate them based on days of ownership.
The proration principle: The seller is responsible for taxes (and other periodic costs) for every day they owned the property in the current year. The buyer is responsible from the closing day forward. The proration credit appears on the closing disclosure as a debit to the seller and a credit to the buyer.
Step 1: Calculate the daily tax rate = Annual taxes ÷ 365
Step 2: Count the seller's days of ownership (January 1 through the day before closing, or through the day of closing depending on contract terms — typically the day before)
Step 3: Seller's proration = Daily rate × Seller's days
Step 4: Entry on closing disclosure = Debit to seller, Credit to buyer
> Worked Example: > Annual taxes (estimated): $7,300 > Closing date: September 15 > Seller's days (Jan 1 through Sept 14): 257 days > Daily rate: $7,300 ÷ 365 = $20.00/day > Seller's debit: 257 × $20.00 = $5,140 > The buyer will pay the full tax bill in the fall (~$7,300). The seller's $5,140 credit to the buyer at closing reimburses the buyer for the seller's portion.
HOA dues paid in advance (common for annual or quarterly billing) require a credit back to the seller for any days prepaid beyond the closing date.
> Example: Annual HOA dues of $2,400 prepaid January 1. Closing is April 1 (day 91). > Daily rate: $2,400 ÷ 365 = $6.575/day > Seller prepaid for 365 days but only owned through day 91. > Credit to seller for prepaid days 92–365 (274 days): 274 × $6.575 = $1,801.55
When a tenant-occupied property closes mid-month and the tenant has already paid the full month's rent to the seller, the buyer receives a credit for the days the buyer will own the property.
> Example: Monthly rent $1,800. Tenant paid for full month on March 1. Closing is March 20. Buyer owns days 20–31 (12 days). > Daily rent: $1,800 ÷ 31 = $58.06/day > Credit to buyer: 12 × $58.06 = $696.72
| Item | Seller | Buyer | |------|--------|-------| | Property taxes (arrears) | Debit | Credit | | HOA dues (prepaid) | Credit | Debit | | Tenant rent (prepaid to seller, buyer takes over) | Debit | Credit |
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Quiz Questions:
Q1. Annual property taxes on a home are $5,475. The closing date is July 2. Using a 365-day year, the seller owned the property January 1 through July 1 (182 days). What is the seller's tax proration debit?
A) $1,500.00 B) $2,715.00 C) $2,730.00 D) $2,750.00
Answer: C — Daily rate: $5,475 ÷ 365 = $15.00/day. Seller's days: 182. Proration: 182 × $15.00 = $2,730. This appears as a debit to the seller and credit to the buyer on the closing disclosure.
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Q2. Property taxes on a home are $9,125 per year. The closing date is October 1. Using 365 days, how many days does the seller owe (January 1 through September 30)?
A) 273 days B) 274 days C) 270 days D) 365 days
Answer: A — January (31) + February (28) + March (31) + April (30) + May (31) + June (30) + July (31) + August (31) + September (30) = 273 days. The buyer takes ownership on October 1, so the seller's period ends September 30. Daily rate: $9,125 ÷ 365 = $25.00/day. Seller's debit: 273 × $25.00 = $6,825.
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Q3. A seller prepaid annual HOA dues of $1,200 on January 1. The closing date is July 1 (day 182). The buyer will own the property for days 183–365. How much does the seller receive as a credit for prepaid HOA dues?
A) $600 (half the year) B) $603.29 (183 remaining days × $3.2877/day) C) $496.44 (remaining days based on exact proration) D) $0 — HOA dues are not prorated at closing
Answer: B — Daily rate: $1,200 ÷ 365 = $3.2877/day. The buyer will own days 183–365 = 183 days. Seller's credit: 183 × $3.2877 = $601.65 (approximately $602; the closest answer is B at $603 — slight rounding differences may appear in exam questions). The concept: the seller prepaid for days they won't own, so the buyer is debited and the seller is credited.
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Q4. On the closing disclosure, how do property taxes typically appear when closing in mid-year and the seller has not yet paid the current year's taxes?
A) Debit to buyer; credit to seller B) Debit to seller; credit to buyer C) No entry is made — taxes are the buyer's responsibility after closing D) Both buyer and seller are debited for their respective shares
Answer: B — Property taxes in Texas are paid in arrears. At closing, the seller owes the buyer a reimbursement for the seller's share of the year's taxes (since the buyer will pay the full annual bill later). This appears as a debit to the seller (reducing their net proceeds) and a credit to the buyer (reducing what the buyer owes at closing).
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Q5. A rental property closes on March 20. The seller collected full-month March rent of $2,100 from the tenant on March 1. March has 31 days. The buyer will own the property from March 20 through March 31 (12 days). How much should the buyer receive as a rent proration credit?
A) $700 (one-third of the month) B) $812.90 (12 ÷ 31 × $2,100) C) $767.74 (12 days at daily rate) D) $100 per day × 12 = $1,200
Answer: B — Daily rent: $2,100 ÷ 31 = $67.74/day. Buyer's days: 12. Credit: 12 × $67.74 = $812.90. The seller collected rent for the whole month; the buyer gets a credit for the 12 days the buyer will own the property. This appears as a debit to the seller and credit to the buyer.