In most states, property taxes are paid partially in arrears, meaning toward the end of the tax period rather than at the beginning. The property taxes you pay on Oct. 1 of a given year -- 2015, for example -- cover the taxes that accrue on your property for the entire 2015 calendar year.
Property Tax Arrears
Ordinarily, a payment is in "arrears" because it is past due. In property tax discussions, however, while the tax you're paying on its due date is for taxes partially accrued before that date -- hence the idea of "arrears" -- it is a timely payment. When a property changes hands late in the tax year -- any time after the due date to the end of the tax year -- some complications related to payments in arrears may ensue.
Buyer and Seller's Fair Share of Property Tax
Assume that a house is sold exactly 10 months after the beginning of the tax year. In fairness, the seller is responsible for only 5/6 of the total tax bill for that tax year -- the taxes accrued during the first 10 months. The buyer is responsible for the final two months, when she was the legal owner. Since the seller has already paid the full year's taxes, she is due a refund.
This division of the tax bill into two sections --1/6 and 5/6 in the example -- is called proration. It simply means the act of dividing the tax obligation according to the ownership periods of the buyer and seller.
Where Confusion May Arise
Buyers and sellers are occasionally confused by the difference between the tax year and the due date on those taxes. This usually occurs because although property taxes are spoken of as being "paid in arrears," in reality they are paid partially in arrears and partially in advance. For example, if the tax year runs from January through December, the due date on those taxes may fall in October, which means that effectively the owner pays nine months in arrears and the remaining three months in advance.
When the buyer buys the house after Oct. 1, she is responsible for the taxes already paid by the seller until the end of the year. If escrow closes on Nov. 15, for instance, the seller is entitled to a rebate of the taxes already paid on that property from Nov. 15 through Dec. 30. Normally, this is handled by the seller's paying the full year's property taxes and being credited back in escrow for the amount paid after his ownership ended --the closing date. This amount is added to the seller's amount due.
These credits and debits are further clarified in the HUD-1 closing statement required by Federal law. Given to all buyers and sellers at the closing of escrow, it shows the property tax debits and credits assigned to the buyer and seller.