Understanding Tax Prorations: Why One Closing Can Produce Two Very Different Settlement Statements

Remember those algebra problems that started with, "A train leaves New York at 57 mph..." I didn't care when or where they met. They might fall off a cliff. Things happen, you know. But, sometimes you just have to tackle the math. This is one instance.

Tax prorations are among the most misunderstood items on a settlement statement. Buyers and sellers often assume the numbers are simply generated by the closing software, but the calculations depend on two things: how each tax is collected and what the purchase agreement requires.

In Alabama, property taxes are based on a tax year running from October 1 through September 30. State and county taxes are collected in arrears, while many municipal taxes are collected in advance. As a result, the same closing can produce very different prorations depending upon whether the contract provides for a true proration or states that all taxes will be prorated "as if paid in arrears."

Consider the following example.

Facts

• Closing date: January 15, 2027
• Seller is responsible for the day of closing.
• A 365-day year is used.
• Annual state taxes: $3,638.05 (paid in arrears)
• Annual county taxes: $5,876.85 (paid in arrears)
• Annual municipal taxes: $6,436.55 (paid in advance)

On October 1, 2026, the seller paid:

• State taxes for October 1, 2025 through September 30, 2026
• County taxes for October 1, 2025 through September 30, 2026
• Municipal taxes for October 1, 2026 through September 30, 2027

Notice that the state and county payments relate to the prior tax year, while the municipal payment relates to the current tax year.

For the current tax year (October 1, 2026 through September 30, 2027):

• Seller owns the property 107 days (October 1 through January 15).
• Buyer owns the property 258 days (January 16 through September 30).

Method One – All Taxes Prorated "As If Paid in Arrears"

Many purchase agreements simplify the closing by providing that all taxes will be prorated as if they are paid in arrears.

Under this method, all three taxes are treated alike, regardless of how they are actually collected.

Total annual taxes:

State: $3,638.05

County: $5,876.85

Municipal: $6,436.55

Total: $15,951.45

Seller's share:

107 ÷ 365 × $15,951.45 = $4,675.22

The settlement statement would show:

• Debit Seller: $4,675.22
• Credit Buyer: $4,675.22

The buyer receives the credit because the contract assumes the buyer will ultimately bear responsibility for paying all taxes.

Method Two – True Proration

A true proration treats each tax according to the way it is actually collected.

State and County Taxes

State and county taxes are paid in arrears.

Although the seller paid tax bills on October 1, 2026, those payments satisfied taxes for the prior tax year ending September 30, 2026. The taxes accruing during the current tax year (October 1, 2026 through September 30, 2027) will not be due until October 1, 2027, when the buyer will own the property.

Accordingly, the seller should credit the buyer for the seller's portion of those future taxes.

Combined state and county taxes:

$3,638.05 + $5,876.85 = $9,514.90

Seller's share:

107 ÷ 365 × $9,514.90 = $2,789.84

Settlement statement:

• Debit Seller: $2,789.84
• Credit Buyer: $2,789.84

Municipal Taxes

Municipal taxes are paid in advance.

The seller's payment on October 1, 2026 purchased municipal tax coverage for the current tax year running from October 1, 2026 through September 30, 2027.

Because the buyer will own the property for the remaining 258 days of that tax year, the buyer should reimburse the seller for that prepaid benefit.

Buyer's share:

258 ÷ 365 × $6,436.55 = $4,551.53

Settlement statement:

• Debit Buyer: $4,551.53
• Credit Seller: $4,551.53

Net Effect of the True Proration

Seller receives a credit for prepaid municipal taxes:

$4,551.53

Seller owes the buyer for state and county taxes:

$2,789.84

Net credit to seller:

$1,761.69

The settlement statement would therefore show:

• Net Credit Seller: $1,761.69
• Net Debit Buyer: $1,761.69

Why the Results Are Different

Notice that under the "as if paid in arrears" method, the seller is debited $4,675.22.

Under a true proration, the seller instead receives a net credit of $1,761.69.

The difference—$6,436.91—is essentially the annual municipal tax. The reason is straightforward. The simplified method ignores the fact that the seller prepaid municipal taxes for the current tax year. A true proration recognizes that the buyer receives the benefit of those prepaid taxes after closing and therefore reimburses the seller.

The Takeaway

When reviewing a settlement statement, remember that the question is not simply whether taxes have been paid. Instead, ask:

• What tax period did the payment cover?
• Is the tax collected in arrears or in advance?
• What proration method does the purchase agreement require?

Those three questions determine which party should ultimately bear each tax expense. As this example illustrates, the difference between prorating taxes "as if paid in arrears" and performing a true proration can shift thousands of dollars between the buyer and seller.