What Gets Prorated in TX Multifamily Sales (and What Doesn't)
When you sell a multifamily property in Texas, certain recurring expenses get divided between you and the buyer based on who owns the property during each billing period. This allocation process, called proration, ensures each party pays only for the time they actually owned or benefited from the property.
Common prorated items in TX multifamily sales:
- Property taxes (both county and municipal)
- Rent collected from tenants
- Property insurance premiums
- HOA or condo association dues
- Water, sewer, or trash bills (when owner-paid)
- Prepaid maintenance contracts
Items that are NOT prorated:
- Real estate commissions
- Loan payoff amounts
- Title insurance and closing fees
- Repair credits or seller concessions
- Capital improvements completed before closing
Understanding this distinction helps you read your settlement statement accurately and avoid surprises at closing. Prorations affect your net proceeds differently than fixed closing costs because they can result in credits to either party.
The Math Behind Proration: 365-Day vs 360-Day Methods
Texas multifamily closings typically use the 365-day method for proration calculations, though your purchase contract should specify which approach applies. The basic formula remains the same regardless of method: annual amount divided by days in the year, multiplied by the number of days each party is responsible.
365-day method example: Annual property taxes of $7,300 divided by 365 days equals $20 per day. If you owned the property for 200 days of the tax year, your share is $4,000 and the buyer's share is $3,300.
360-day method example: The same $7,300 in taxes divided by 360 days equals $20.28 per day. Your 200-day ownership period would cost $4,056, with the buyer responsible for $3,244.
The difference might seem small, but on larger multifamily properties or longer billing periods, it can affect your closing proceeds by hundreds of dollars. Always verify which calculation method your contract specifies and double-check the math on your settlement statement.
Most Texas title companies use software that automatically calculates prorations, but errors do occur. Having a basic understanding of the math helps you spot discrepancies before signing closing documents.
Property Tax Proration in Texas: Paid vs Unpaid Scenarios
Texas property taxes create the most complex proration scenarios because they're billed in arrears (after the tax year) and often span multiple billing cycles. The key factor is whether taxes have been paid for the current year and who paid them.
Scenario 1: Taxes already paid by seller If you paid the full year's property taxes in advance, the buyer owes you a credit for the portion covering their ownership period. On a January 15 closing where you paid $6,000 in taxes for the full year, the buyer would owe you approximately $5,750 (covering January 16 through December 31).
Scenario 2: Taxes not yet paid When current-year taxes haven't been paid, you typically receive a debit for your ownership period, and the buyer gets credited for the same amount. This credit helps the buyer pay the full tax bill when it comes due.
Scenario 3: Estimated tax amounts If the current year's tax assessment isn't final, prorations use the previous year's amount or the tax assessor's estimate. Texas property tax appeals can affect these calculations, so factor potential adjustments into your net proceeds planning.
The closing date significantly impacts your tax proration. Moving a closing from December 30 to January 2 could shift thousands of dollars in tax responsibility between parties on a valuable multifamily property.
Rent and Security Deposit Allocations at Closing
Rent prorations follow a straightforward principle: you keep rent for days you owned the property, and the buyer gets rent for their ownership period. However, the mechanics can get complex with multiple units, different lease terms, and varying collection dates.
Monthly rent proration example: Your duplex generates $2,400 monthly rent ($1,200 per unit). On a January 15 closing, you keep rent for January 1-15 (15 days), which equals $1,200. The buyer receives a $1,200 credit for January 16-31 (16 days).
Security deposit transfers: Security deposits transfer to the buyer at closing since they'll be responsible for returning them when tenants move out. This appears as a credit to the buyer and a debit to you on the settlement statement. The amount should match your actual deposits held, not the lease amounts.
Prepaid rent complications: If tenants paid rent beyond the closing date, you owe the buyer credits for the prepaid period. Last month's rent held as a deposit also transfers to the buyer. These items can significantly impact your closing proceeds, especially on larger multifamily properties.
Accurate rent roll documentation becomes crucial for proper proration calculations. Discrepancies between your records and tenant lease terms can delay closing or create post-closing disputes.
Reading Your Settlement Statement: Proration Credits and Debits
Your HUD-1 or Closing Disclosure shows prorations in the expense section, with separate line items for each prorated expense. Understanding how to read these entries helps you verify the calculations and identify errors before closing.
Credit entries (money coming to you):
- Buyer's share of prepaid insurance
- Buyer's portion of prepaid HOA dues
- Buyer's share of rent for post-closing period
- Buyer's responsibility for unpaid property taxes
Debit entries (money you owe):
- Your share of unpaid property taxes
- Security deposits transferring to buyer
- Your portion of insurance if buyer paid at closing
- Prepaid rent beyond closing date
The net effect of all prorations appears in your total proceeds calculation. A large property tax proration can sometimes offset other closing costs, while unfavorable rent timing might reduce your expected cash more than anticipated.
Common settlement statement errors to watch for:
- Wrong daily rates due to calculation method confusion
- Incorrect number of days in ownership periods
- Missing or double-counted expense categories
- Security deposit amounts that don't match actual holdings
Professional due diligence includes reviewing proration calculations before closing. Most title companies welcome questions about these calculations and can provide detailed breakdowns of their math.
Remember that prorations are closing adjustments, not changes to your property's sale price or tax implications. They affect your cash at closing but don't alter the fundamental economics of your sale or 1031 exchange planning.