Definition
At closing, ongoing costs like property taxes and insurance are split between you and the seller based on who owns the property during each time period. Each of you pays only for the days you own it.
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Prorations are a standard part of real estate transactions where expenses don't align with closing dates. Rather than one party paying the entire annual cost, expenses are divided on a daily basis. The buyer typically reimburses the seller for pre-paid taxes and insurance, and the seller reimburses the buyer for any rent collected in advance. Prorations appear on the settlement statement as either buyer credits (money owed to the buyer) or buyer debits (money owed by the buyer).
Pro Tip
Ask your title company to calculate prorations using actual days, not a 30-day month assumption, for accuracy.
Example
Annual property taxes are $2,400. The property closes on April 15th. The seller owed taxes for January 1-April 14 (104 days). Proration: ($2,400 ÷ 365 days) × 104 days = $682.19, which the buyer credits to the seller (or the seller credits to the buyer).