Prorations, Prepaid Rent, and the Seller's Net
Closing is set for August 12 on a duplex that sold for $312,000. The seller's existing loan will pay off at $146,850. The commission is 6% of the sale price, split evenly between the listing and selling brokerages, and the listing brokerage pays its agent 60% of its side. The seller pays for the owner's title policy ($1,150) and deed preparation ($75). Annual property taxes are $4,380 and, as in most Indiana counties, they are billed and paid in arrears. The upper unit rents month-to-month for $1,450, due on the first, and the seller holds a $1,450 security deposit. A quarterly water bill of $180 covering the three months before closing will be paid by the seller at closing. Nothing in the contract specifies a proration convention beyond 'customary in the county.'
1. Prorate the property taxes. Which party gets the credit, and how much?
Read the worked answer
First, the direction. Indiana taxes are assessed and paid in arrears: the bill for a given year is issued and paid the following year. The seller has occupied the property from January 1 through closing without yet paying for those days, so the seller owes the buyer for the accrued portion. Debit seller, credit buyer.
Second, the convention. The default is the actual-day method on a 365-day year, with the seller charged through the day before closing (buyer owns the day of closing). Because the contract says only 'customary in the county,' state the convention on the settlement statement so the numbers can be verified.
Third, the math.
- $4,380 ÷ 365 = $12.00 per day
- Seller's period, Jan 1 – Aug 11: 31 + 28 + 31 + 30 + 31 + 30 + 31 + 11 = 223 days
- 223 × $12.00 = $2,676 debit to seller, credit to buyer
- Cross-check: the buyer's period, Aug 12 – Dec 31, is 142 days × $12 = $1,704, and $2,676 + $1,704 = $4,380.
Sensitivity: charging the seller through the day of closing gives 224 days and $2,688; a 360-day/30-day-month convention gives a slightly different figure. Any of these is defensible if disclosed - but the buyer will receive a tax bill next year that covers the whole year, so the credit must be computed accurately enough that the buyer is not subsidizing the seller's occupancy. Note also that delinquent prior-year taxes are a lien and must be cleared at closing, separate from the proration.
2. How are the August rent and the security deposit handled?
Read the worked answer
Rent is prorated; the deposit is not. These two are constantly confused, and they are not the same kind of item.
Rent: the seller collected the full month on August 1 but only earned the days before closing. Using actual days:
- $1,450 ÷ 31 = $46.77 per day
- Seller keeps Aug 1–11: 11 × $46.77 = $514.52
- Buyer receives Aug 12–31: 20 × $46.77 = $935.48 → debit seller, credit buyer
(A 30-day-month convention would give $48.33/day and a $966.67 credit. Either works if disclosed; the actual-day method is more common and is what most settlement software produces.)
Security deposit: $1,450 is the tenant's money, held in trust. It is never prorated. The seller credits the buyer the full $1,450, and the buyer assumes the obligation to return it. The buyer should also receive a written assignment of the lease, a rent roll, and ideally a tenant estoppel confirming the deposit amount and that no rent is prepaid - otherwise the buyer inherits a liability for a deposit the seller already spent.
Two extras worth flagging: verify whether the tenant is current or owes back rent (any arrearage stays the seller's problem), and confirm that the month-to-month tenancy can be terminated or continued as the buyer intends - the lease survives the sale.
3. Compute the seller's net proceeds and the listing agent's share of the commission.
Read the worked answer
Commission: 6% × $312,000 = $18,720, split evenly → $9,360 to the listing brokerage and $9,360 to the selling brokerage.
Listing agent's share: 60% × $9,360 = $5,616 (the brokerage retains $3,744). Note that this is paid to the brokerage and split out to the agent by the brokerage - the seller does not pay the agent directly.
Seller's debits:
| Item | Amount |
|---|---|
| Commission | $18,720.00 |
| Accrued taxes (223 days × $12) | $2,676.00 |
| Owner's title policy | $1,150.00 |
| Deed preparation | $75.00 |
| Water bill | $180.00 |
| Loan payoff | $146,850.00 |
| Rent credit to buyer | $935.48 |
| Security deposit credit to buyer | $1,450.00 |
| Total debits | $172,036.48 |
Net to seller: $312,000.00 − $172,036.48 = $139,963.52.
Common errors to avoid: (1) treating the security deposit as rent and prorating it; (2) crediting the seller for taxes instead of debiting, which reverses a $5,352 swing; (3) charging the seller the full 6% and a split; (4) forgetting that the water bill is an expense of the seller's period and is paid at closing rather than prorated; and (5) omitting any county transfer fee or the buyer's lender fees, which are the buyer's charges and do not belong in the seller's column.