Prorated calculations in real estate transactions allocate costs and revenues between buyer and seller based on the actual usage period. For example, if a seller prepays property taxes covering July 1st to June 30th, and the closing date is October 15th, the buyer would reimburse the seller for the unused portion of the tax year, from October 16th to June 30th. This calculation typically involves determining the per diem rate of the expense and multiplying it by the number of days the buyer will own the property within the prepaid period. Common prorated items include property taxes, homeowner’s association dues, and prepaid insurance.
Accurate proration ensures a fair and equitable distribution of financial responsibility, preventing one party from unduly benefiting at the other’s expense. This practice contributes to transparency and smoother transactions by clearly outlining each party’s financial obligations at closing. Historically, proration has become a standard practice to address the complexities arising from mid-period real estate transfers and maintain financial equilibrium between parties.
