How Tax Proration Can Change the Money Due at Closing
When buying or selling a home in Michigan, most people focus on the purchase price, earnest money deposit, and closing costs.
But there's another part of the Purchase Agreement that can affect the final numbers: property tax proration.
Depending on the property taxes and the closing date, the adjustment can amount to thousands of dollars.
And changing the closing date by just one week can change the calculation.
What Is Property Tax Proration?
Property tax proration is the process of dividing property taxes between the buyer and seller according to the terms of their Purchase Agreement.
Michigan properties commonly have summer and winter tax bills. However, when a bill is issued and how that bill is divided between the buyer and seller are not necessarily the same thing.
The Purchase Agreement establishes which proration method the parties have selected.
For example, the Michigan Realtors Purchase Agreement includes several choices under Section 14, Real Estate Taxes:
No Proration: The seller pays taxes due before closing, and the buyer pays taxes due on or after closing.
Calendar Year Proration: Taxes are allocated as though they cover the calendar year in which the bills are issued.
Fiscal Year Proration: Taxes are treated as billed in advance over the applicable taxing authorities' fiscal years.
Due Date Proration: Taxes are treated as billed in advance beginning when the bills first become payable.
Other: The parties may specify a different arrangement.
These options can produce different closing adjustments, even with the same purchase price and closing date.
You can review the original Michigan Realtors Purchase Agreement, Section 14.
How Much Can the Closing Date Change the Calculation?
Imagine a home with $8,000 in annual property taxes.
That works out to approximately $21.92 per day in a 365 day year.
Moving the closing date by seven days changes the allocation by approximately $153.42.
On a property with $15,000 in annual taxes, the same seven day change amounts to approximately $287.67.
Those figures don't mean one party automatically receives a check for that amount. The actual credit or charge depends on the agreed proration method, which taxes have already been paid, and how the closing statement is prepared.
Try changing the closing date in the interactive example below.
What Can One Week Change?
Enter the annual property taxes and a proposed closing date. See how shifting that date changes a simple calendar year tax allocation.
Who Receives the Credit at Closing?
This is where the details matter.
If the seller has already paid taxes covering a period after closing, the buyer may reimburse the seller for the buyer's portion.
If taxes covering the seller's period remain unpaid, the seller may provide the buyer with a credit.
The exact treatment depends on the Purchase Agreement and the applicable tax bills.
Before closing, ask your title company to explain the tax proration line on the closing statement.
What About the Buyer's Future Property Taxes?
This is a separate issue from tax proration.
Under Michigan law, a qualifying transfer of ownership generally causes the property's taxable value to become uncapped in the calendar year following the transfer.
That means buyers should not assume the seller's current property tax bill represents what they will pay after purchasing the home.
Michigan provides a free Property Tax Estimator to help buyers estimate future property taxes.
I've also created a video showing buyers how to use the estimator.
Watch My Video: How to Use Michigan's Property Tax Estimator
The estimator is useful for budgeting, but actual taxes depend on taxable value, local millage rates, exemptions, and other applicable assessments.
What Buyers and Sellers Should Remember
Before signing a Purchase Agreement or reviewing a closing statement:
Confirm which tax proration method is selected.
Understand how the closing date affects the allocation.
Ask whether the calculation uses actual or estimated tax bills.
Check how paid and unpaid taxes are handled.
Review any special assessments separately.
For buyers, estimate future property taxes rather than relying on the seller's current bill.
The important lesson is that property taxes are not automatically split the same way in every Michigan real estate transaction.
The Purchase Agreement matters.
For more information about the terms that can affect your transaction, read my Purchase Agreement Basics guide.
If you're considering selling and want to understand your potential net proceeds, visit my Sell a Home page.
This article provides general information. The specific Purchase Agreement, applicable tax periods, and closing statement determine the actual tax allocation.