What process is used to allocate payments such as taxes at closing?

Proration is the correct process used to allocate payments such as taxes at closing. This method ensures that expenses like property taxes, homeowner association fees, and other shared costs are divided fairly between the buyer and seller based on the time each party owned the property during the billing period.

In real estate transactions, it’s essential to have an equitable distribution of costs because the seller typically owns the property up until the closing date, and the buyer takes ownership thereafter. Proration accounts for the exact days each party should be responsible for such expenses, helping to calculate how much either party owes or is owed at closing.

This method ensures accuracy in financial reporting and prevents disputes regarding payments due. For instance, if property taxes are due annually but the closing occurs midway through the year, proration accurately determines how much of the tax bill should be paid by the seller and how much by the buyer.

Other terms listed, such as settlement, allocation, and adjustment, do not specifically pertain to the fair division of future or ongoing expenses based on shared ownership timeframes as proration does. Settlement refers more generally to the culmination of a real estate transaction, allocation can imply the distribution of any kind of payment (not necessarily recurring expenses), while adjustment is often related to modifying terms