In real estate transactions, why is it necessary to prorate taxes on closing?

Prorating taxes on closing is essential because it ensures that each party involved in the transaction pays their fair share of property taxes based on the time they owned the property during the tax year. Property taxes are typically assessed annually, so when a sale occurs, the ownership of the property is transferred at a specific point in time, and the tax liability needs to reflect the periods of ownership accurately.

This process involves calculating the portion of taxes attributable to the seller for the period they owned the property before the closing date and the portion that will be the responsibility of the buyer for the time after the closing. By prorating taxes, both parties can ensure they are not unfairly burdened with the entire tax dues for the year when they were only responsible for part of it. Thus, proration of taxes is a fair way to allocate financial responsibilities based on actual ownership periods, contributing to a smoother transaction and fostering good relationships between buyers and sellers.