Prorations
Prorations divide continuing property costs at the closing date so that each party pays only for the time they owned the property.
They appear on the settlement statement as a debit to one side and a matching credit to the other, and on a transaction closing mid-year they can be substantial.
Property taxes, and the arrears problem#
The largest proration, and the one that confuses people.
Minnesota property taxes are paid in arrears — the bill covers a period that has already passed. That means the direction of the adjustment depends on where the closing falls relative to the payment dates.
Close before a payment is due and the seller typically credits the buyer for the period the seller occupied but has not yet paid for. Close after the seller has paid forward and the buyer typically credits the seller.
Both directions are normal. What matters is that the figure is calculated from the right base — and where the current year's tax has not been finalised, that base is an estimate.
Estimates that become final#
Many contracts prorate on the most recent known tax figure and treat the result as settled.
That is fine when taxes are stable. It is not fine after a reassessment, a classification change, or where a special assessment has been certified to the parcel and has not yet appeared in the figure being used.
Some contracts provide for a post-closing adjustment when the actual bill issues. Most do not. Which version applies is worth knowing before signing rather than after receiving a bill larger than the proration assumed.
Association dues and prepaid items#
Homeowners association dues prorate the same way. So do prepaid services that transfer with the property — some maintenance contracts, occasionally fuel in a tank on properties with propane or heating oil.
Rental property: rent and deposits#
On an occupied property two further items appear, and they behave differently.
Rent for the closing month is prorated. The seller collected it for the whole month; the buyer owns the property for part of it, and the balance passes across.
Security deposits transfer in full. They are not prorated, because they are not income — they are the tenant's money held in trust, and the obligation to return them passes to the new owner.
That distinction matters enormously. A buyer who does not receive the deposits at closing has acquired the obligation to repay them without the funds to do it, and discovers this when a tenant moves out.
Minnesota law governs how deposits must be held and returned, and the new owner inherits that obligation regardless of what was handed over. Confirming the deposit amounts and receiving them at closing is not a detail; it is the whole of the buyer's protection.