Tax proration can be confusing especially in Greene County and Montgomery County, Ohio where I specialize in selling real estate. The Montgomery County method is short while the Greene County method is long and the counties are located next to each other! It can be difficult to explain different tax proration methods to clients. Hopefully, most real estate agents don’t live in an area where 2 different methods are used. But if you list and close deals in both Greene and Montgomery Counties as I do, it’s important to understand both short and long proration.
In both counties, taxes are billed six months in arrears which usually means at a closing the purchasers will be paying a pro-rated share of taxes for a time period that they did not live on the property.
When the purchasers receive the first tax bill in their new residence, they discover it is for a time period way before they purchased the property and they sometimes feel something was mishandled with the tax proration at closing.
At a closing, the purchasers receive a pro-rated share of taxes from the seller. For example, if a closing is at the end of March, the sellers, under the terms of the standard Purchase Agreement, and using the Montgomery County method of proration (short proration), will owe to the purchasers taxes for 90 days (counting January 1 through March 31). This amount will be credited to the purchasers at closing. Then, when they receive a tax bill in June, they will pay the full amount of that bill. The purchasers will be paying the balance of the six-month period but, keep in mind, this June bill relates to the previous July through December as far as the county is concerned.
Other Ohio counties usually do not use the Montgomery County method (short proration) but have the taxes prorated beyond the next bill due (long proration). Traditionally in Greene County, the agreement reached between buyers and sellers is to have the sellers pay taxes for the actual days they owned the property. This is accomplished by having the sellers pay the entire “next” bill after closing and then prorating the bill becoming due six months after that. Using the previous example of a March 31 closing, the sellers would pay the June bill in its entirety and then the December bill would be prorated between sellers and buyers, with the sellers paying approximately 90 days and buyers the remaining 90 days of the six-month period. With the long proration, the sellers are actually paying taxes before they are due. This may be because the buyers are not comfortable with taxes in arrears. Of course, taxes are negotiable and it is important that the closing is consistent with the terms of the purchase agreement so whatever method is agreed upon at the point of a formally accepted offer is what will be performed at closing.
To summarize, there are two common ways of pro-rating taxes – the short proration (Montgomery County method) and the long proration.
Short Proration: Pro-rating the “next” bill will fulfill all requirements of having taxes current, but it relates to six months in arrears.
Long Proration: Pro-rating to actual day of ownership, taxes collected in advance of the bill due. The seller pays the next bill due after closing and pro-rated share of the bill after that.
Keep in mind that if you purchase and sell using the same method, long or short, you will be paying taxes exactly for the number of days you owned the property. The difference is that in the short proration, the number of days does not correspond to the actual days (it’s shifted six months in arrears). In the long proration, it corresponds to the actual days you owned the property. No matter which method is used, it is important that there is a mutual agreement and understanding between the parties regarding the method of tax proration.