Bronson agreed to sell his house to the Hatchers. Closing is scheduled for May 15. Bronson already paid the taxes for the entire year, but the Hatchers are assuming responsibility for the taxes as of the closing date. The settlement statement will prorate the taxes as a:

• A. Debit to the buyer and credit to the seller
• B. Debit to both parties
• C. Credit to the buyer and debit to the seller
• D. Credit to both parties

Answer: (D)

Taxes are prorated at closing based on how many days each party owned the property in the tax year. When the seller has already prepaid the entire year's taxes, the settlement statement splits that annual amount into two portions: the portion covering the time the seller owned (before closing) and the portion covering the time the buyer will own (after closing). Because the prepaid amount is shared between these two periods, both sides receive a credit on the settlement to reflect their respective share of the tax obligation after the closing date. In other words, the proration acknowledges that (1) the seller’s ownership period was paid in advance and (2) the buyer’s ownership period will be paid going forward, with both sides shown as receiving credits to balance the allocation.