Quick answer
Work out the daily rate, count the days each party owned the property, and decide whether the expense was prepaid or is still owed. Prepaid items are credited to the seller and debited to the buyer. Items owed but unpaid are credited to the buyer and debited to the seller. The contract says who owns closing day.
A real estate proration calculation is arithmetic wrapped in three decisions. The arithmetic is easy. Candidates lose marks on the decisions, and they lose them in the same three places every time.
Decision one: which year
Two conventions, and the question will tell you which to use.
The statutory or banker's year treats every month as 30 days and the year as 360 days. It is simpler and appears in most exam questions.
The calendar year uses actual days, 365 or 366, and actual month lengths. It is more accurate and more tedious.
If the question does not specify, the 360-day year is the safer assumption, but read carefully first. A question that says "using the actual number of days" has told you.
Decision two: who owns closing day
The contract decides. Two conventions exist, and the exam will state one:
- The seller owns the day of closing, so the seller's count includes it.
- The buyer owns the day of closing, so the seller's count stops the day before.
One day rarely changes the answer enough to move between choices, but sometimes it is put there deliberately. Read the sentence that tells you.
Decision three: paid ahead or still owing
This is the decision that flips the entire answer, so it is worth slowing down for.
| Situation | Seller | Buyer |
|---|---|---|
| Expense paid in advance, covering time after closing | Credit | Debit |
| Expense owed but not yet paid, covering time before closing | Debit | Credit |
| Rent collected in advance for the month of closing | Debit | Credit |
The logic underneath is always the same question: who has the money now, and who used the service?
A seller who paid a full year of insurance in January and closes in April has paid for eight months they will not use. They get that money back as a credit, and the buyer, who is receiving the benefit, pays it as a debit.
Property taxes in Georgia are billed and paid in arrears, meaning the bill arrives for a year that has already happened. At a mid-year closing the seller has used months of local services without paying for them, so the seller is debited and the buyer credited. The buyer then pays the whole bill when it arrives.
Exam trap
Rents reverse the intuition. A landlord who collected September rent on the first and closes on the tenth is holding money that belongs to the buyer for the rest of the month. The seller is debited, the buyer credited. Every other prepaid item runs the other way.
Running one all the way
Annual property tax is $3,600, unpaid, on a closing dated 15 September. Use a 360-day year and give the seller the day of closing.
- Daily rate. $3,600 divided by 360 is $10 per day.
- Seller's days. January through August is 8 months at 30 days, or 240 days, plus 15 days of September, giving 255 days.
- Seller's share. 255 multiplied by $10 is $2,550.
- Entries. The tax is unpaid, so the seller is debited $2,550 and the buyer credited $2,550. The buyer pays the full $3,600 when the bill arrives and has already been compensated for the seller's part.
Now the same closing with the tax already paid in full. The seller has covered 105 days they will not own. The seller is credited $1,050 and the buyer debited $1,050.
Same daily rate, same date, opposite entries, because one fact changed.
Debits and credits, plainly
A debit is a charge against a party, money they must bring or give up. A credit is money in their favour.
The full purchase price is a debit to the buyer and a credit to the seller. Earnest money already paid is a credit to the buyer, because they have handed it over already. A new loan is a credit to the buyer, because the lender is bringing that money to the table. The seller's existing loan payoff is a debit to the seller.
The millage guide covers how the Georgia tax figure itself is produced, the math drill will keep serving prorations until the three decisions come automatically, and the formula sheet has the daily-rate setup written out.
Check yourself
1. Annual property taxes are $4,320, unpaid at closing. Closing is 1 May, using a 360-day year, with the seller responsible through the day before closing. What is the seller's share?
Show the answer
Answer: A. The daily rate is $4,320 divided by 360, which is $12. The seller owns January through April, or 120 days. 120 multiplied by $12 is $1,440.
2. A seller prepaid a full year of hazard insurance of $1,800 on 1 January. Closing is 1 July, using a 360-day year. How is this handled?
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Answer: B. The seller paid for six months of coverage they will not use. Prepaid items are credited to the seller and debited to the buyer.
3. A tenant paid $1,500 rent for the month on 1 June. The property closes on 16 June with 30 days in the month and the buyer owning closing day. How is the rent prorated?
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Answer: B. The seller collected rent covering days the buyer will own. Money already collected for the buyer's period is debited to the seller and credited to the buyer.
4. Which item appears as a credit to the buyer on the closing statement?
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Answer: B. The new loan is money the lender brings on the buyer's behalf, so it is a credit to the buyer. The purchase price and the costs the buyer agreed to pay are debits.
FAQ
Which year do I use if the question does not say?
A 360-day year is the usual exam convention and the safer default. Read for a phrase like "using actual days" first, because that instruction overrides the default.
Are Georgia property taxes paid in advance or arrears?
In arrears. The bill covers a year that has already run, which is why an unpaid tax proration debits the seller and credits the buyer.
Does the closing attorney do this in practice?
Yes. In Georgia the closing attorney prepares the settlement statement and calculates the prorations. The exam still asks you to do it, because you need to be able to explain a figure to a client who queries it.
What happens to the earnest money on the statement?
It appears as a credit to the buyer, because the buyer has already paid it. It reduces what they need to bring to closing rather than adding to it.