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Real Estate Math Video #6b - Prorate Real Estate Taxes (365 Day Method) | Real Estate Prep Exam - YouTube
Channel: The Real Estate Classroom
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[Music]
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prorations are a big part of any real
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estate licensing
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exam and i guarantee you're going to
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have at least one question
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on prorations i'm going to show you how
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to prorate taxes
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in this video in this video i'm going to
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show you how to prorate
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taxes now there's a couple of things
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that we have to know
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before we start calculating any
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proration problem
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that might be on your real estate
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licensing exam
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so let's take a look at those
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prerequisites
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now the first thing we need to figure
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out is does the test question want us to
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calculate this proration problem based
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on a
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360 30 day year or is it a 365 day year
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now a 360 or 30 day year simply means
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that they want calculations based on a
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30-day month
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no matter how many days are actually in
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that month so january would have
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30 days in february would have 30 days
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for calculation purposes
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a 365 day year means
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we're going to just simply take the
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number of days in those months
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and use them for our calculations so
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that's number one
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now by the way the test will always give
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you that information number two
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have the have the property taxes been
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paid in advance
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or in arrears again the the licensing
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exam will give you the information that
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you need in that test question
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who is responsible for the day of
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closing is it the buyer or the seller
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and lastly as with any prorations
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we want to know is this going to be a
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cost
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or a credit to the buyer in the seller
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and that's what we're trying to figure
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out
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in this tax proration question now one
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now one of the things that i like to do
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before i start calculating any proration
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particularly with taxes is i like to
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just write down on a piece of scratch
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paper
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the months of the year because that'll
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help me keep everything
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organized as i'm making the calculations
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so
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let's get right to our problem here tim
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purchased 123 main street
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annual taxes are one thousand six
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hundred dollars
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for the calendar year and the seller has
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prepaid taxes
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through the end of the year if closing
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is september 17th
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what amount of tax will be prorated at
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closing
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pro rate based on a 365 day year
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the day of closing will be the
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responsibility of the seller
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okay now we have all the information
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that we need from this problem
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to do our calculations so first of all
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the problem identified that we're going
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to be making calculations based on
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a 365 day year which means we're just
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going to simply use the total number of
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days
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in each month number two it also
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identified
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that the taxes were prepaid by the
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seller
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so they are paid in advance so the
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seller is already paid
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all the way for this entire 12 month or
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one year period
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we also found out that the day of
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closing the day of closing is the
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responsibility of
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the seller so here's what we know so far
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i can already tell
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by the information that was given to me
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in the calculation problem
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that the buyer is going to have a cost
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and the seller is going to get a credit
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because remember
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the seller prepaid the the taxes through
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the end of the year
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and closing is september 17th so the
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seller is going to be responsible for
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the amount of taxes that were already
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paid through september 17th
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and then the buyer is going to be
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responsible for the taxes
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from the 17th through the or the 18th i
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should say through the end of the year
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so there's going to have to be a
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reimbursement by the buyer
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to the seller which means that is a
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buyer cost
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and a seller credit all right so now
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that we have all the information that we
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need from our problem now we can start
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doing our calculations so
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it all starts with the total amount of
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taxes that are paid
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each year and the total total taxes paid
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every calendar year is one thousand six
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hundred dollars
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but we know that we're going to make our
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calculation based on a 365 day year so
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what i want to do is turn this sixteen
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hundred dollars
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into our daily rate or what's called a
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per diem rate so that means we're going
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to take 1600
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and divide it by 365 which represents
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365 days
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and when we do that we get an amount of
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four dollars and 38 cents
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per day all right so that's our daily
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per diem now we know that the uh
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the closing is the 17th of
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september and we also know that the 17th
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is the responsibility of the seller
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so we're going to find out how much the
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buyer has to reimburse the seller
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okay so we know and this is where i like
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to go back to kindergarten math and use
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our little hands to do our counting
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this is really important when there's
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like 31 days in the month
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but we have september and there are
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seven the 17th
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is the closing date so we have one the
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first second third fourth fifth
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sixth seventh eighth ninth tenth 11
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12 13 14 15 16
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17. so there's 17 days
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that the seller is responsible for so
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that means there's 13 days that the
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buyer is responsible for
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now let's go ahead and fill in our
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number of days for october november and
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december
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we know that there's 31 days in october
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we know there's 30
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days in november and we know there's 31
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days in december so that gives us a
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total of
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92 days 92 days for these three months
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but we also have to take into
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consideration the 13 days that the buyer
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is responsible
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for the month of september so we're
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going to take 92 plus 13
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and that gives us a total of 105 days
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105 days that the
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buyer must reimburse the seller for
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all right so we take the number of days
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105 days and we multiply that by
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our per diem rate of 4.38
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and that gives us a grand total of
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459.90
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if i've done the math correctly and i
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believe that i have
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459 dollars and 90 cents so
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the answer to our question here is
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the buyer is going to have a cost or a
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debit cost and debit for the purposes of
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the real estate exam mean the same thing
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and the licensing exam likes to use
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those two terms interchangeably
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so there's a buyer cost of 459 dollars
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so therefore that means there is a
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seller
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credit in the amount of 459.90
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notice one thing here very important
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when you're doing
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uh calculations for prorations
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these two numbers should always be the
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same
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if we're calculating rents and property
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taxes
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all right and one of the things that
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happens quite often on a licensing exam
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one of your potential correct answers
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could be c
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and it'll say it's a buyer cost of
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800 dollars and a seller uh
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credit of 1200.
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notice that these two numeric values are
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different
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that should tell you automatically that
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c
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is not even in the running as a correct
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answer so you can eliminate that one
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just by that but that's only true on
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proration problems
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that are prorating taxes and rents
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all right and that's how we prorate
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taxes check out this video right here
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that's going to help you
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learn how to prorate rents and right
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over here this little circle if you have
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not subscribed to this channel yet
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please click on that
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and subscribe to the channel that's all
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i got for this video i will see you
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in another video
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