Real estate explainer
Settle the Closing
At closing, every dollar is a debit (an amount that party owes into the closing) or a credit (an amount that party receives or has already paid). Bills that cover the whole year or month are split by the day: a proration charges each owner for the days that were theirs. When every line is entered, the buyer’s side and the seller’s side each balance, and what is left over is the cash that changes hands.
- days the seller owns
- days the buyer owns
- day of closing
The bottom line
Each proration, worked
The closing statements
Each proration appears twice: once on the buyer’s statement and once on the seller’s, debit on one side and credit on the other. Rows marked prorated are worked above.
| Item | Debit | Credit |
|---|
| Item | Debit | Credit |
|---|
In a spreadsheet
Put the closing date in B1 and the annual tax in B2. The calls below use your numbers.
The sale
Prorations
What to notice
Arrears or advance decides the direction. Property taxes are often paid after the year they cover. If they are unpaid at closing, the seller owes for the days he owned the house, and the buyer, who will pay the whole bill later, gets that amount as a credit. If the seller paid the year in advance, the buyer repays him for the buyer’s days.
Money the seller holds for the buyer’s time (rent already collected, tenants’ deposits) is a debit to the seller and a credit to the buyer. The price, by contrast, is a debit to the buyer and a credit to the seller, and the buyer’s loan and earnest money are credits only to the buyer.
Why it works
A proration is a daily rate times the days one party owes: annual amount ÷ days in the year × days. The exam may use the actual calendar (365 days, or 366 in a leap year) or the banker’s year of twelve 30-day months (360 days). The two methods give slightly different answers, so read which one the question uses, and whether the seller or the buyer owns the day of closing.
Each statement balances: the cash line is whatever makes the debits equal the credits. Two-party items appear on both statements; items like the commission or the buyer’s loan appear on only one.
“Render therefore to all their dues: tribute to whom tribute is due; custom to whom custom.” Romans 13:7
Try it
- Family home: find the $1,660 tax proration by hand. Then switch the tax to “prepaid.” Why does the amount change to $1,990 and change sides?
- Rented house: why does the $1,800 deposit go to the buyer in full, while only $900 of the rent does?
- Rented house: change the date to April 20 and use the 360-day year. Check the tax proration of $1,320.
- Townhouse: switch between the two ways of counting days. Which favors the seller here, and by how much?
- Move the closing to December 31 with taxes unpaid. What happens to the tax line, and why?
Taxes are assumed to run on the calendar year (January 1 to December 31); rent and dues are prorated within the closing month. Each proration is computed from the exact daily rate and rounded to the cent once. Local custom, the contract and the closing agent decide the real method. All arithmetic is done in whole cents in your browser. No outside code, images or trackers.