As a real estate professional, you’ve mastered the art of the deal. You’ve negotiated inspection terms, navigated appraisal hurdles, and kept your clients calm through it all. But there’s one moment where even the smoothest transactions can hit a snag: the closing table.

Your client’s eyes scan the closing disclosure, and their finger lands on a line item. “Wait, what is this? Why am I paying the seller? Why am I being charged for taxes?”

This, of course, is the magic of prorations. For clients, these debits and credits can feel like a last-minute shell game. For you, the expert agent, they are the key to a fair and logical closing. This guide will arm you with the knowledge to explain prorations confidently, anticipate client questions, and solidify your role as the expert who guides them seamlessly from contract to close.

What Exactly Are Prorations? (The Simple Analogy)

At its core, proration is the act of splitting an expense fairly between the buyer and seller.

Here’s the simplest analogy you can use with your clients:

“Think of it like splitting a dinner bill for a meal you shared. The seller ‘owned’ the house for a portion of the month or year, and the buyer will own it for the rest. Prorations simply ensure that the seller only pays for the days they actually owned the home, and the buyer only pays for their portion. It’s the fairest way to handle shared, ongoing bills.”

The closing date is the line in the sand. The seller is responsible for all costs up to the day of closing, and the buyer is responsible from the day of closing forward.

The Two Golden Rules of Prorations: Arrears vs. Advance

To understand any proration, you first need to know how the bill is paid:

1. Paid in Arrears: This means paying for a service after you’ve used it. (Think: your monthly electric or water bill).
2. Paid in Advance: This means paying for a service before you use it. (Think: your car insurance, or a monthly subscription like Netflix).

This distinction is the key to everything. It determines who owes whom.

The “Big Three” Prorated Items at Closing

You will see these on almost every settlement statement. Here is how to explain each one.

1. Property Taxes (The Most Common Proration)

Property taxes are the most complex proration because collection methods vary by state.

• The Big Question: Are taxes in your state paid in arrears or in advance?
• How it Works (Paid in Arrears): This is the most common method. The tax bill for the current year (e.g., all of 2025) isn’t sent out until the end of the year.
  • Scenario: You close on May 1st, 2025. The seller lived in the home from January 1st to April 30th (120 days). The tax bill for the entire year will be sent to the new owner (the buyer) in November.
  • The Proration: The seller must give the buyer a credit at closing for the 120 days they owned the home. This way, when the buyer pays the full 2025 tax bill in November, they have already been “reimbursed” by the seller for the seller’s portion.
• How it Works (Paid in Advance): This is less common but exists. The tax bill for the current year is paid at the beginning of the year.
  • Scenario: You close on May 1st, 2025. The seller already paid the entire 2025 tax bill back in January.
  • The Proration: The seller has paid for a full year of taxes but will only own the home for 4 months. The buyer must give the seller a credit at closing for the portion of the year they will own the home (May 1st – December 31st).

2. HOA / Condo Association Dues

These are much simpler because they are almost always paid in advance (typically on the 1st of the month).

• Scenario: You close on June 10th. The monthly HOA fee is $300. The seller paid the full $300 fee on June 1st, as required.
• The Proration: The seller paid for the full month but only owned the home for 9 days. The buyer will live there for the remaining 21 days (assuming a 30-day month).
• Calculation:
  • Daily Rate: $300 / 30 days = $10 per day.
  • Buyer’s Share: $10/day x 21 days = $210.
  • Result: The buyer will give the seller a credit of $210 at closing to reimburse them for the dues they paid but won’t get to use.

3. Rental Income (For Investment Properties)

This is also typically paid in advance. The tenant pays rent on the 1st of the month.

• Scenario: You close on August 20th on a duplex. The seller collected $2,000 in rent from the tenant on August 1st for the full month.
• The Proration: The seller is entitled to the rent for the 19 days they owned the property in August, but not for the 12 days the buyer will own it.
• Calculation:
  • Daily Rate: $2,000 / 31 days = $64.52 per day.
  • Buyer’s Share: $64.52/day x 12 days = $774.24.
  • Result: The seller will give the buyer a credit of $774.24.
  • Pro Tip: This does not apply to security deposits. Security deposits are not prorated; they are typically transferred in full from the seller to the buyer as a credit.

What Isn’t Prorated? (Common Client Misconceptions)

Equally important is knowing what doesn’t get prorated, as this can cause confusion.

• Utility Bills, Why These Aren’t Subject to Prorations: These are almost never prorated. As the agent, you should advise your seller to schedule a final reading for the day of closing. The seller pays their final bill, and the buyer starts a new account in their own name.
• On-Site Fuel (Propane, Heating Oil): This is a classic “gotcha.” A proration is a shared expense. A 500-gallon propane tank full of fuel is property. It’s not prorated; it’s sold.
  • How to Handle It: If the seller wants to be reimbursed for the fuel left in the tank, this must be written into the purchase contract. The closing agent will order a reading from the fuel company, determine the value of the remaining fuel, and add it to the settlement statement as a debit to the buyer and a credit to the seller.
• Mortgage Payments: A seller’s final interest is prorated (paid in arrears), but the buyer’s principal and interest are not. The buyer will, however, pay prepaid interest from the date of closing to the end of the month. It’s crucial to differentiate these on the closing disclosure.

Your Role as the Agent: Preventing Surprises

Your value is in your preparation. Don’t let the closing table be the first time your client thinks about these numbers.

1. Be Proactive: As soon as you are under contract, confirm with the closing agent/title company how prorations for taxes are handled in your jurisdiction.
2. Gather the Docs: Get a copy of the latest HOA/condo statement and the previous year’s tax bill.
3. Ask About “Extras”: Does the home have a propane tank? Is it an investment property? Get these items to the closing agent immediately so they can be added to the contract or settlement statement.
4. Request a Draft: Ask the closing agent for a preliminary settlement statement for your client to review at least 24-48 hours before closing.
5. Review and Explain: Go through the prorated items with your client before they pick up the pen. A 10-minute phone call to explain the “why” behind the numbers will eliminate 99% of closing-day anxiety.

The Bottom Line: Prorations aren’t a penalty; they are the definition of fairness in a real estate transaction. By mastering these concepts, you remove the element of surprise and prove your value as an indispensable guide through the entire home-buying or selling process.