Pro Rata Tax
Looking at pro rata in real estate we also have to deal with pro rata taxes. The term pro rata is Latin and is used in several domains either in its original form or variations from it like pro-rata, pro rate, pro-rate, prorate, prorating, etc. The meaning of the term is to split shares proportionally to a calculation. The pro rata tax refers to how taxes are split between the shareholders that have to pay them. As taxes are annual costs for any individual or business, they are paid once a year. If changes of ownership happen the situation of pro rata tax comes into play. The pro rata tax is also used when several businesses rent a building and the owner prorates the taxes between those businesses. So let’s look at each situation regarding the pro rata tax.
Pro Rata Taxes in Real Estate Transactions
When it comes to pro rata taxes in real estate transactions we look at the proportionate division of taxes at the closing between the buyer and the seller. As mentioned above, if ownership of a property changes from the seller to the buyer and the annual taxes for that property are already paid, the taxes are divided between the two parties. Taxes are proportionally calculated for the ownership of the seller and buyer. The difference that the buyer must reimburse the seller is usually included in the closing cost of the transaction.
The taxes that are paid annually like property taxes or school taxes might not be paid on the same day, as school taxes are required at the start of the school year. This can impact the real estate transaction as the seller, in the end, will cover the amount of taxes for the period of the year they still resided in the house. Similarly, the buyer will cover the pro rata tax remaining for the period they will reside in the house.
Example: The seller paid the property tax at the start of the year. When the transaction takes place the tax is already paid. The buyer needs to pay back the seller with the percentage of the property tax for the remaining time of the year since the closing date of the sale. So, if the transaction takes place at the beginning of April, the buyer must reimburse the seller with 75% of the property tax.
In case the seller had not paid the taxes when the transaction takes place, the municipality will send a debit proration to the seller and a credit proration to the buyer. A proportionate share of the tax value for the time each owned the house.
Pro Rata Taxes in Commercial Real Estate
Company partnerships deal with pro rata taxes at the partnerships level. In this situation the partnership completes the tax return when the expenses, incomes and revenues are stipulated and the partners pay these taxes. But as one partner might own 5% of the partnership’s shares while another owns 30% of the shares, their taxes are calculated pro rata from the whole considering their ownership shares.
Similarly, in a mall with 20 stores, the owner of the mall determines how much value each store has to pay in taxes based on their square footage. This is calculated by the same formula as pro rata in commercial real estate.
Popular Real Estate Terms
Assures that the title is free of any legal claims including encumbrances. It includes covenants of seizin, freedom from encumbrance, express warranties of title, right to quiet enjoyment, ...
The bonus depreciation definition refers to a tax incentive that allows a business to accelerate the depreciation deduction in the year when the asset is purchased and placed into use. The ...
Real rate of interest on a loan. It is the coupon rate divided by the net proceeds of the loan. Assume Sharon took out a $1,000,000, on year, 10% discounted loan to buy real estate. The ...
individual who purchases property for another for the purpose of not identifying to the seller and other interested parties the real identity of the true acquirer. The individual who makes ...
The legal definition of conversion is the act of using property or funds with which one has been entrusted for purposes other than those for which the property was intended to be used by ...
Expiration of a lease or insurance policy by mutual consent of the parties, also to give up. ...
Are you thinking to yourself: What does replacement cost mean?When someone in the Real Estate Market mentions Replacement Cost, they are talking about an evaluation of how much it ...
Individual or entity that divides up a large piece of owned land into smaller pieces generally for the purpose of developing them into homes for sale in the future. ...
Method of using the buyer's down payment on a home as an interest bearing collateralized account to help offset the mortgage amortization process. The home down payment is used to ...
Have a question or comment?
We're here to help.