Short vs Long Tax Proration

Certified Mortgage Advisor
NMLS 1701021
Published 
March 7, 2019

Tax Proration: Let's learn and be prepared

Really quickly want to walk through what Tax Proration is. So if you're looking at putting in an offer on a house, most likely you've heard tax proration, there's short proration, there's long proration. So I wanted to walk through the difference between the two and what it means for you at the end of the deal.

Sometimes tax is paid in arrears

So in the state of Ohio taxes are paid semi-annually. So they paid in February, and in July, not only that but taxes are also paid in arrears. So the semi-annual payments are paid six months prior. So it can get a little confusing because let's say that you close on your house and you move in July and then you get a tax bill, will you just move it into the property?

But you've got a tax bill for the time that the seller was in the seller is in property, and so you're wondering, why am I responsible to pay this tax bill? We just moved in? This is because taxes again are paid in arrears.

What is tax proration

So the way to solve this is through what's called tax proration. So all we're doing with tax proration is prorating the time that the seller was in the property and giving you the credit for it.

How to calculate proration

So there are two ways of calculating this and this can be negotiated in the contract. So there's short proration, which is pretty common around Montgomery county and there is long proration, which is more common around the rest of the nation.

Short proration

The short proration is we're going to start in January and we're going to count every single day until you close and give you a tax credit for that amount. So if taxes are, let's say $1,200 a year, taxes are a hundred dollars a month. So let's say that you close on March 1st, you'll be getting a $200 tax credit. So we had all of July's taxes, all of February's taxes. Then, the seller gives you that to you as a credit at closing, so that can pay down your closing costs.

Long proration

The short proration is we're going to start in January and we're going to count every single day until you close and give you a tax credit for that amount. So if taxes are, let's say $1,200 a year, taxes are a hundred dollars a month. So let's say that you close on March 1st, you'll be getting a $200 tax credit. So we had all of July's taxes, all of February's taxes. Then, the seller gives you that to you as a credit at closing, so that can pay down your closing costs.

Short vs. Long Proration

So again, that's the difference. Short proration in this example gives you $200. Whereas long proration gives you an $800 credit. So long per proration can be beneficial to you if you need. Some of those closing costs paid down a little bit more.

But it can take away from your negotiation position, right? Because remember the seller is the one pane for that proration credit and they don't always want to give up that money.

How to know if its short or long proration?

So something to consider. In the contact, you'll see a check box. If it's unchecked, it's going to be long proration, and if it's checked, it's going to be short. So this example, now this is a long proration of taxes. So this buyer would be getting from January, till closing, plus six months of tax credit.

When your escrowing your taxes

Now some of the consider here if you're escrowing your taxes, which means you're having the lender pay them and you're just making monthly payments towards your taxes, then you won't have to worry about having that tax bill due. The lender will be paying the tax bill for you. And you'll just be making those monthly payments.

Tiny difference in your closing cost

But at closing, you'll still get a credit for either short proration or long proration. So basically it's just a small portion of the contract that can affect the difference in your total closing costs because this is a credit. Sometimes it's gonna be a small credit with short proration, or it can be a larger credit with long proration.

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