New Jersey Real Estate Salesperson · Real Estate Calculations
Prorations
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In 30 seconds
A proration divides an ongoing expense or income between seller and buyer so each pays only for the days of ownership. The tested distinction is that an item paid in arrears is owed by the seller and credited to the buyer, while a prepaid expense is refunded to the seller and charged to the buyer.
Why this matters
Proration questions are lost not on arithmetic but on direction, because the exam wants to know whether an item was paid in advance or in arrears and therefore which party is debited and credited.
The college version
In normal terms
- Prorations split recurring items such as taxes, rent, association dues, and insurance at closing, using a daily rate times the days each party is responsible for.
- The problem states the year to use, a statutory year of 360 days with twelve 30-day months or an actual year of 365 days, and who owns the closing day; the contract controls.
- Paid in arrears means the seller still owes a share, so debit seller and credit buyer; prepaid means the seller already covered the buyer's share, so credit seller and debit buyer.
Concepts in this outline
- Proration purpose — fairly divides recurring expenses and income at closing so each party pays or receives only for the days that party owned the property.
- Calendar year versus fiscal year — a calendar year runs January through December; a fiscal year is any twelve-month budget or tax period starting on another date, so count days from its start.
- 360-day versus 365-day year — the statutory or banker's year uses twelve 30-day months; the actual year uses real days in each month; the problem states which applies.
- Monthly, daily, and annual proration — convert the annual figure to monthly by dividing by twelve, then to daily by the month or year length, and multiply by days owed.
- Tax proration — taxes paid in arrears are debited to the seller and credited to the buyer for the seller's unpaid days; New Jersey bills quarterly (see Topic 20).
- Rent proration — rent is collected in advance, so the seller credits the buyer for the unused portion of the month after closing, along with any security deposits transferred.
- HOA assessment proration — association dues prepaid by the seller are credited to the seller and debited to the buyer for the days after closing that the seller already covered.
- Insurance proration — a prepaid policy assumed by the buyer is refunded to the seller for unused days; many buyers instead buy a new policy, and the seller cancels for a refund.
- Who is charged and credited at closing — a debit charges a party and a credit pays a party; the seller's debit for an unpaid item becomes the buyer's credit for the same amount.
Eli explains
The same idea, in plain words
Explain it like I’m 10
Imagine two kids sharing a bag of candy bought for the month, but one moves away on the fifteenth. Fair means each pays only for their days. That fairness at closing is a proration.
Every proration has three steps: find the daily rate from the annual or monthly amount, count the days each party is responsible for, then multiply and decide who owes whom.
The year matters. A statutory year, or banker's year, has 360 days made of twelve 30-day months, while a calendar year has 365 actual days; the problem states which to use. A fiscal year is a budget year that does not start on January first.
Direction matters more. Paid in arrears means the bill comes after the period, so the seller has used unpaid days; the seller is debited and the buyer credited. Rent is paid in advance, so the seller holds money for days the buyer will own; again debit seller, credit buyer. Prepaid insurance or dues run the other way. Many exam problems give the seller the closing day, but the contract controls.
Worked example
Nadia is closing a Toms River rental on June 15, using a 360-day year with the seller owning the closing day. Property taxes are $7,200 a year and are paid in arrears, so the daily rate is $7,200 ÷ 360 = $20. The seller owned January 1 through June 15, which is five 30-day months plus 15 days, or 165 days, so 165 × $20 = $3,300 is debited to the seller and credited to the buyer. The tenant paid $3,000 rent for June on June 1, which is $100 a day. The buyer will own June 16 through June 30, 15 days, so $1,500 of that advance rent is debited to the seller and credited to the buyer. Both entries move money from seller to buyer, for opposite reasons.
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