How do tax prorations in Michigan affect your closing costs?

Feb 14

In Michigan, tax prorations play a crucial role in determining the amount of cash due at closing during a real estate transaction. Let’s break it down:

What Is Tax Proration?
- Tax proration involves dividing the annual property taxes between the buyer and seller based on the time each party owns the property during the tax year.
- Essentially, it ensures that both parties contribute their fair share of property taxes.
Agreement Between Buyer and Seller:
- Buyers and sellers can agree on how to prorate taxes in their contract. However, if no specific agreement exists, Michigan law provides guidelines for tax proration.
Michigan’s Property Tax Act (Act 206, 1893):
- When no proration agreement exists, the law specifies how taxes should be prorated at closing.
- Here’s the breakdown:
  - Taxes are prorated as though paid in advance.
  - The seller is responsible for all tax levies made prior to, but not including, the date of closing.
  - The buyer must pay all future tax levies and any taxes that might be levied on the closing date.
  - If a levy occurs within the twelve months preceding the closing date, prorations must be made for that period.
  - The buyer is not responsible for any part of the real estate tax between the levy date and the closing date.
  - The buyer is responsible for taxes from the closing date to the last day of the twelve-month tax period.
  - Effectively, this is a proration of taxes in advance 1.
Practical Calculation:
- To calculate the prorated tax amount, consider two time periods:
  - Seller’s possession period: From the levy date to the day before closing.
  - Buyer’s possession period: From the closing date through the last day of the twelve-month period following the levy date.
Online Tools:
- You can use online property tax proration calculators to estimate the prorated amount based on the closing date, local, county, and school tax amounts2.
- Additionally, Michigan’s Property Tax Estimator allows you to compare property taxes and millage rates with other local units3.