Prorations: 365-day and 360-day methods

Divide time, then assign the adjustment

Proration divides an expense or income between seller and buyer according to their respective periods of ownership. First identify the covered period, the amount to allocate, the day-count method, who owns the closing day, and whether the money has already been paid or collected. Follow the contract or the exam question for these choices; neither a 365-day method nor a closing-day allocation should be assumed.

Two day-count methods

Under the 365-day method in a nonleap year, divide an annual amount by 365 and count actual calendar days. Under the 360-day method used here, divide the annual amount by 360 and treat each month as 30 days. Equivalently, divide by 12 for a monthly rate, then by 30 for the daily rate. Keep full precision until rounding the final adjustment to cents.

For example, annual unpaid expenses are $3,600, closing is April 11 in a nonleap year, and the buyer owns closing day. On a 365-day basis, the seller owns January 1 through April 10: 31 + 28 + 31 + 10 = 100 days. The daily rate is $3,600 ÷ 365, and the seller's share is $3,600 × 100 ÷ 365 = $986.30. On a 360-day basis, the seller has three 30-day months plus 10 days: 90 + 10 = 100 days. The daily rate is $3,600 ÷ 360 = $10, giving $1,000. The same day count can still produce different dollar amounts. If the seller instead owned closing day, one additional day would belong to the seller under either method.

Decide who owes whom

For an unpaid expense that the buyer will pay later, the seller owes the seller's accrued share: debit seller, credit buyer. For an expense already paid by the seller that benefits the buyer after closing, reimburse the seller for the buyer's share: debit buyer, credit seller. For rent already collected by the seller covering the buyer's ownership period, transfer the buyer's income: debit seller, credit buyer. A debit increases a party's charges; a credit reduces them or increases the amount due that party.

Florida tax context

Florida property taxes are paid in arrears for the calendar year. At a closing before payment of the annual bill, the seller's allocated tax expense is ordinarily a seller debit and buyer credit, because the buyer will pay the bill. Florida Statutes section 197.162 provides the regular early-payment discount schedule: 4 percent in November, 3 percent in December, 2 percent in January, 1 percent in February, and no discount in March. These payment discounts are distinct from the ownership-day calculation. Use the tax amount specified for the proration, rather than independently adding a discount. Check that seller and buyer days cover the entire period once and that their shares total the amount allocated.