Credit and charges for proportionate share of income or expenses

On the close of escrow, buyers and sellers receive a credit or a charge for their proportionate share of income or expenses involved in the ownership or operations of the property being conveyed, called prorations.

Prorations are usually calculated based on the date escrow closes. However, they may be set based on any date agreed to by the buyer and seller. For calculating prorations based on the date of closing, the entire day of closing is the first day of the buyer’s ownership, unless the escrow instructions specify otherwise.

Items which the buyer takes over and are prorated include:

  • property taxes;
  • interest on mortgages/bonds assumed;
  • rent; and
  • service contracts assumed by the buyer.

Prorations are initially agreed to in the purchase agreement. Proration provisions entitle the seller to a credit for the portion of prepaid sums which have not fully accrued by the day of closing on items the buyer takes over or receives on the sale. Prorations are based on a 30-day month or a 360-day year.

Conversely, the buyer receives a credit for unpaid amounts assumed by the buyer which accrued through the day prior to the close of escrow. [See RPI Form 150 §12.6]

Property taxes are levied for the fiscal year which begins July 1st and ends June 30th of the following calendar year. To prorate property taxes, the beginning of the fiscal year – July 1st – is the starting point for accrual.

Property taxes are paid in one or two installments. The first installment is payable no later than December 10th for the first half of the fiscal year. The second payment is due no later than April 10th for the second half of the fiscal year.

For interest on mortgages, improvement bonds or other debts assumed by the buyer, the seller is charged and the buyer receives a credit for the interest accrued and unpaid during the seller’s ownership of the property through the day before the close of escrow.

Prorations on the purchase of income property

On the purchase of income property, the buyer is entitled to a credit for the prepaid rents collected by the seller which have not accrued for the remaining days of the month beginning with the day of the close of escrow.

All security deposits held by the seller are credited to the buyer as a lump sum adjustment, not a proration. After closing, the buyer is responsible to account to the tenants for the deposits on termination of their tenancies. [See RPI Form 585]

The seller is credited for any delinquent unpaid rents which have accrued prior to closing and are to be collected by the buyer, unless otherwise agreed in the purchase agreement and escrow is so instructed.