August 12: Taxes, Rent, and a Deposit
You are the transaction-broker handling a closing set for Tuesday, August 12. Contract price is $520,000. The county treasurer bills $3,650 annually for property taxes; taxes are paid in arrears, and the current year's bill will not be due until the following spring. The property has a tenant paying $1,950 per month on the 1st; the tenant's $1,950 security deposit is held by the seller. The contract provides that the day of closing belongs to the buyer, that prorations use a 365-day year and 30-day months, and that the seller transfers the deposit to the buyer at closing. Earnest money of $10,000 is already in the title company's escrow.
1. Compute the property tax proration. Who is debited, who is credited, how much, and why does it run in that direction?
Read the worked answer
Conclusion: Debit seller $2,230; credit buyer $2,230.
Reasoning:
- Daily rate: $3,650 ÷ 365 = $10.00 per day.
- Days the seller owns: January 1 through August 11 (the day of closing belongs to the buyer). Month-by-month: 31 + 28 + 31 + 30 + 31 + 30 + 31 = 212, plus 11 days in August = 223 days.
- Seller's share: 223 × $10 = $2,230.
- Direction: Colorado taxes are paid in arrears - the buyer will pay the entire year's bill next spring and will have received no payment from the seller for the seller's months of ownership. The credit reimburses the buyer for the seller's 223 days.
- Check: if the closing were December 31, the seller would bear the full $3,650; if January 1, essentially nothing. The computation is consistent at both ends.
2. Prorate the August rent and handle the security deposit. What is the net credit or debit to the buyer on the settlement statement?
Read the worked answer
Conclusion: Buyer's net credit is $1,580.
Reasoning:
- Rent: $1,950 ÷ 30 = $65.00 per day (contract specifies 30-day months).
- Buyer owns August 12–31 = 20 days; seller owns August 1–11 = 11 days. Buyer's share = 20 × $65 = $1,300. Since the seller already collected the whole month, debit the seller $1,300 and credit the buyer $1,300.
- Security deposit is not income - it is a liability to the tenant. It is transferred, not prorated: debit the seller $1,950 (removing the liability from the seller) and charge the buyer $1,950, because the buyer now holds the tenant's money and must return it at move-out.
- Net to buyer: +$2,230 (taxes) + $1,300 (rent) − $1,950 (deposit) = +$1,580 credit.
- Common error to avoid: crediting the buyer the deposit as though it were rent, which would double-count and leave the buyer without a recorded obligation to the tenant.
3. The lease says deposits are returned 'within 60 days of move-out.' The tenant vacates three weeks after closing and the buyer retains $600 for cleaning. Identify the compliance issues.
Read the worked answer
Conclusion: The 60-day clause is enforceable, but the buyer's $600 retention is only lawful if it is properly documented and tied to actual amounts owed.
Reasoning:
- Colorado requires a landlord to return a security deposit within one month after termination of the lease unless the lease provides a longer period, which may not exceed 60 days. A 60-day clause is within the limit, so the buyer's deadline runs from the tenant's move-out, not from closing.
- The buyer, as successor landlord, must send the deposit - or a written statement itemizing any amounts retained and why - to the tenant's last known address within that period. Transfer of the deposit at closing does not shorten or reset the obligation.
- Retention must correspond to actual loss: unpaid rent, damage beyond ordinary wear and tear, or cleaning only if the lease imposed a return-standard of cleanliness. Normal wear and tear is not chargeable.
- Wrongful withholding carries statutory exposure, including multiple damages and attorney fees, so a $600 cleaning deduction that cannot be documented is a bad trade.
- As transaction-broker, your role was to make sure the deposit amount and the lease terms were accurately conveyed at closing; how the buyer later accounts for the money is the buyer's duty, but a sloppy handoff is a common source of the dispute.