Proration
Proration is the division of a charge that covers a period, such as a year's real estate taxes, between buyer and seller according to the part of the period each owns the property. In Virginia the split follows the purchase contract, because no statute sets a formula for dividing the tax between them.
A tax line for each direction the money moves
On a federal Closing Disclosure, the real estate tax can show up twice, on paired lines that point in opposite directions. One is money the buyer pays back to the seller; the other is money the seller credits to the buyer. Both are proration.
The rule behind the form, 12 CFR 1026.38, itemizes the prorated amount of any prepaid taxes due from the buyer to reimburse the seller at closing, and the prorated amount of any unpaid taxes due from the seller to reimburse the buyer. Each line carries the time period its amount corresponds to, and each is labeled by the taxing body, "City/Town Taxes" or "County Taxes". The rule governs the mortgage transactions it covers.
Which line gets used depends on whether the bill has been paid. If the seller has already paid tax for a stretch of time after the closing date, the buyer pays that share back. If tax for a stretch before closing is still unpaid, the seller credits the buyer for that share. Either way the arithmetic is the same: the charge for the period, split by the share of that period each party owned the land.
Those lines sit among every other receipt and payment on the closing paperwork, and reading the whole document line by line is covered in what a settlement statement is.
No Virginia formula for the split, so the purchase contract draws the line
Virginia does not write a formula for the buyer and seller split into law.
Va. Code 58.1-3340 makes real estate taxes a lien on the land ahead of any other lien, and on the split between the parties it says only that the seller's liability for taxes and levies "shall be effectively prorated contractually". The date the split runs to and the method used come from the purchase contract, and the settlement agent applies what the contract says.
A second rule is easy to mistake for it: the IRS draws its own date-of-sale line for who is treated as paying the tax on a federal return. That line does not write the credit on a Virginia closing statement, and any question about the return is a CPA's.
Local practice adds its own turns. A Virginia locality may collect real estate tax in one installment or two, and Floyd County says it is not a pro-rated county, with transfers recorded after January 1 not reflected on that year's record. Those details are worked through in how property taxes are prorated at closing. Roll-back taxes on land leaving a use value program are a different charge from the year's tax bill, and whether a buyer and seller share one is the subject of who pays rollback taxes when land sells.
Questions about the tax proration lines on a land closing statement?
Send the county, the closing date and what the contract says about taxes, and Lowell will walk through the proration lines with you before settlement. No cost, no obligation.
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Questions about this term
Why does the Closing Disclosure list city or town taxes apart from county taxes?
Because the federal rule labels them separately. The Closing Disclosure itemizes prorated taxes under City/Town Taxes and County Taxes, each with its own time period. Land inside an incorporated town such as Hillsville answers to both the town and the county, so each authority's tax can be prorated on its own line.
Where this page's facts come from
Every rule, office and figure above traces to one of these. Rules change; check the office before you act on one.
- 12 CFR 1026.38: content of the Closing Disclosure Electronic Code of Federal Regulations
- Va. Code 58.1-3340: lien for taxes, and proration by contract Code of Virginia
- Va. Code 58.1-3916: local tax due dates and installments Code of Virginia
- Publication 530 Internal Revenue Service
- Commissioner of the Revenue Floyd County, Virginia