Real Estate Tax Proration In Michigan
An Article For My Buyers and Sellers
By Bill Rasmussen
06 March 2025
In Michigan there is no right or wrong method of tax proration – it is simply a matter of negotiation, or agreement, between the buyer and the seller. And, it is a financially important issue!
Imagine a real estate closing where there is a disagreement over who owes a $3500 property tax bill that will become due and payable two weeks after the closing. Who is responsible for the tax bill, the seller or the buyer? Should the seller be responsible for a property tax bill that isn’t due and payable until after closing? Should the buyer be responsible for the tax bill that’s due two weeks after closing? The issue should have been dealt with and resolved long before the closing; the issue should have been understood, agreed to, and resolved at the time the parties entered into the agreement of sale.
The available methods – proration in advance, proration in arrears, no proration (the buyer will pay the next tax bill), fiscal year proration, calendar year proration, etc. – can easily affect the true financial result, or cost, of a real estate transaction by hundreds, or even thousands, of dollars.
How taxes are prorated in a real estate transaction is not determined by the township treasurer, the city clerk, the county treasurer, the title office personnel, your mortgage broker, or your veterinarian. The dates stamped on the tax bills also have no bearing whatsoever! Unless the purchaser is the State of Michigan or another governmental agency, Michigan’s statutory law allows the buyer and the seller in a real estate transaction to choose whatever method of tax proration they wish. (M.C.L.A. 211.2 Sec.2, par.4)
There are only two times that Michigan’s statutory law mandates a method of proration between a buyer and a seller: (1) is when property is acquired for public purposes by the state or another municipality or, (2) when the tax proration issue has not been addressed in a purchase agreement. In these cases, the law provides that taxes are to be prorated as if they are paid in advance from the “due and payable” date and that they cover a 12-month period. (www.michiganlegislature.org Michigan Compiled Laws, section 211.2, paragraphs 3 and 4 under section 2).
The method that is commonly “agreed to” between buyer and seller is usually the method that is “furnished by default” in the purchase agreement form that happens to be used for the particular sale transaction. If the Purchase Agreement form provides alternative methods from which to choose, the method usually “chosen” is the method that the selling agent selects when filling out the purchase agreement form for the buyer. Any method can easily be changed to accommodate an alternative agreement between the parties if both parties so desire and if they agree to a different method.
Most of the local associations of Realtors within the State of Michigan have developed their own, unique, “form” purchase agreement for use by their Realtor members. These “form” agreements usually include a specific method of tax proration, each having evolved over many years. These local methods have produced a “customary” way of dealing with tax proration for the association’s particular geographic area. Typically, the method or methods have evolved from the opinions or personal preferences of the few people who have “been in power” at the time that the forms were developed or last revised. Any of these individual form agreements can be used for a real estate transaction anywhere in Michigan.
There’s no right or wrong method for prorating taxes. Using “local custom” to select a method of tax proration may be an acceptable way to select a method, but it is not the only acceptable way to select a method. It might be a method, but it is not the method. Checking your horoscope to decide what to have for dinner is a way to make the decision, but it is not the way to make the decision.
Regardless of how taxes are prorated in a real estate transaction, the financial result of the chosen method should be clearly explained, understood, and agreed to by both parties to the transaction before a purchase agreement has been entered into by the parties. Whenever an agent writes an offer for a buyer or presents an offer to a seller, he or she should also clearly estimate and explain the monetary cost or credit to each party based on the tax proration method selected before a legal, binding contract has been created. The time to discover the financial effect of the tax proration provision is not after an agreement has been reached; and, the time for discovery is not at the closing table.
You may wonder why an agent, working for either a buyer or a seller, doesn’t just structure the tax proration in a way that will provide the greatest financial benefit to the party for whom they’re working. The issue is usually not that simple. Tax proration is just one piece of the larger puzzle of trying to put together the overall real estate transaction. For example, if a buyer desires the tax proration to be structured in such a way that requires the seller to pay for all, or the majority of the taxes, the seller may see the offer as being too “one-sided.” The seller may not only see those taxes as not being his responsibility, he may feel that the buyer is trying to take advantage of him, and negotiations concerning the entire transaction can be strained and may eventually fall apart completely.
In addition, the way in which tax proration is structured for a particular real estate transaction will frequently have a financial impact on the buyer’s ability to qualify for mortgage financing. Often, a real estate agent will use the “proration in arrears” method, or some similar method, to structure the transaction in such a way that will allow the buyer to receive a substantial credit from the seller at closing so that the buyer will be able to qualify for a particular mortgage financing program. The real estate agent will often purposely do this so that the “cash poor” buyer will have enough money to qualify for the loan, which solves the larger task of allowing the buyer to qualify for financing and therefore be able to buy the property. So, in this instance, if the seller demanded that this offer be changed to reflect too much of a difference in the tax proration formula, he will likely disqualify this particular buyer for financing. Such thinking by the seller, if he or she continues to hold on to this view, may continue to eliminate other similar buyers who would otherwise qualify to buy the property.
Real estate tax proration may also be an emotional issue for both the buyers and the sellers. Many people “on the street” offer advice and opinions on how real estate taxes should be prorated. This “advice” is usually offered to the buyer or the seller after the buyer and seller have entered into a legal, binding purchase agreement. The advice is offered in the form of what the buyer or seller or real estate agent “should have done,” which really tends to stir up the emotions. When a buyer or seller feels that they’ve been charged too much and that they’ve been “cheated” with regard to the tax proration, the emotions can run wild.
Thinking about the issue of tax proration is somewhat similar to thinking about the question of which came first, the chicken or the egg. Here is a hypothetical situation that may help to illustrate how the thinking can go:
Imagine a closing scheduled for November 21 in the year 2024. Also, assume that $4,000 in property taxes is due and payable on December 1, 2024, one week after closing. The buyer’s thoughts typically work like this: “Why should I pay the entire tax bill, or any portion of the tax bill, that is due and payable a week after closing when the seller has lived in the property for 51 weeks of the year?” With this thinking, the buyer feels that taxes cover a time period “in arrears.”
With the same hypothetical situation, a seller’s thoughts may work like this: “Why should I pay any portion of the tax bill that is due one week after closing when the buyer will receive the benefits of the county, township, and school services that will be able to be provided as a result of those taxes being collected to cover services in the year that follows that tax bill?” With this thinking, the seller feels that taxes cover a time period “in advance.”
Neither thinking is “right” or “wrong.” It all depends on how you want to look at it. Let me present another analogy: If a gasoline station advertises a 5 cent discount per gallon for cash sales, does the cash buyer really save 5 cents, or does the credit card buyer really pay 5 cents more? It all depends on how you want to look at it.
A shrewd real estate investor may attempt to negotiate his or her real estate transactions in such a manner so as to prorate in arrears when buying (to receive a credit from the seller when buying) and to prorate in advance when selling (to receive a credit from the buyer when selling).
Before I summarize some of the available tax proration methods, it will help to understand some of the terminology that is used in tax proration. Tax bills become due and payable on the dates that they are billed, or levied, which are usually December 1st and July 1st. They are payable without penalty, however, by later dates, typically February 14th and September 14th.
Here is a summary of some of the available tax proration methods:
Proration in Advance
Taxes are treated as if they are paid in advance, or forward, from the due and payable date (December 1 and/or July 1) and are considered to cover the 12-month time period following the same due and payable date (except in the city of Detroit, where it is usually considered that each tax bill covers 6 months). If this method is used, the seller is considered to have prepaid taxes for a time period in which the seller will not own the property and will need to be reimbursed. As a result, the seller will receive a reimbursement of taxes in the way of a credit at closing and the buyer will be charged at closing. In addition to the buyer paying a charge at closing, the buyer will pay the next tax bill sent out after closing.
Proration in Arrears
Taxes are treated as if they are paid in arrears, or backward, from the due and payable date (December 1 and/or July 1) and are considered to cover the 12-month period preceding the same due and payable date (except in the city of Detroit, where it is usually considered that each tax bill covers 6 months). If this method is used, the seller is considered to owe a portion of the next tax bill(s) that will become due and payable after the closing date because the seller is considered to have owned the property for part of the time period that the next tax bill(s) are considered to cover. The seller will be charged an amount at closing and the buyer will receive this same amount as a credit at closing. After closing, the buyer will pay the entire amount of the next tax bill(s) sent out.
No Proration
There will be no proration of taxes. The seller will pay all tax bills that are due and payable before a certain date, usually either the date of the purchase agreement or the date of closing, and buyer will pay the next tax bill that is due and payable after a certain date, again usually either the date of the purchase agreement or the date of closing, one of which will be specified in the purchase agreement.
Fiscal Year Proration
Taxes are treated as if they cover the fiscal year of the governmental units for which they are collected and are prorated accordingly between the buyer and the seller. This method usually includes a detailed description within the tax proration provision in the purchase agreement to specify not only which governmental units are included in the proration and their respective fiscal years, but also a clarification as to whether the taxes are considered to have been collected “in advance” or “in arrears” for the governmental units.
Calendar Year Proration
Taxes are treated as if they cover the calendar year in which they become due and payable (December 1 and/or July 1) and are prorated between buyer and seller based on the number of days that each party has owned, or will own, the property during that calendar year.
Many people have an opinion on tax proration, and sometimes people will express their opinions outside of the sale transaction in a manner that often is not favorable to the real estate agents involved in the transaction. Many people do not realize that the tax proration method is completely negotiable, and totally independent of any decision making process other than what a buyer and seller agree to in a purchase agreement. And, they may not realize that, in some cases, the tax proration method chosen for a particular sale transaction has been structured purposely to accommodate the transaction to make it possible for a buyer to qualify for mortgage financing.
If the method of tax proration in a particular purchase agreement is explained to the buyer up-front when the purchase agreement is first written, and the buyer understands and accepts the financial implications of the method selected, what difference does it make how the taxes are prorated? Likewise, if the method of tax proration in a particular purchase agreement is explained to the seller up-front, when the purchase agreement is presented, and the buyer and seller understand and accept the financial implications of the method selected, again, what difference does it make how the taxes are prorated?
What if I told you that when I sell my property, I don’t care if I have to pay the tax bills for the next 40 years? It could, conceivably, be a non-issue, depending, of course, on how high the sale price is and how much money I’ll wind up with at the closing!
Tax proration is a confusing issue. But it is an important issue that needs to be dealt with and understood in the real estate transaction. If the tax proration issue is not fully understood by the buyer and the seller in every real estate transaction, there are likely to be hard feelings which, regrettably, are usually based on the agents’ failure to understand and explain tax proration, on a misunderstanding, or on receiving incorrect “advice” from well-meaning, but misinformed parties from outside of the transaction.
If you have any questions on the tax proration issue, ask me. Or, ask your attorney to explain it to you. My intent is to prevent misunderstandings on the tax proration issue if I can.
Thank you!
Sincerely,
Bill Rasmussen
