California Real Estate Practice Exam

If a seller has paid the first half of an annual tax bill of $1,200, and a fire insurance policy with a three-year premium of $900 is assumed by the buyer, what is the net buyer proration for closing on Mar. 1?

1. $200 credit

2. $275 debit

3. $475 debit

4. $675 credit

The correct answer is: $200 credit

In this scenario, it's important to understand how prorations work at closing, particularly regarding property taxes and insurance premiums. Firstly, the annual tax bill of $1,200 indicates a total of $100 per month in property taxes, since $1,200 divided by 12 months equals $100. If the seller has already paid the first half of the taxes, that means the seller has covered $600, representing six months of taxes. Since the closing date is March 1, the buyer is responsible for the taxes from March onward. From March to December, the buyer will be responsible for the remaining six months of property taxes, which amounts to another $600. Therefore, at closing, the buyer has a total liability of $600 for the upcoming tax period. Next, let's consider the fire insurance premium. The total premium for the three-year policy is $900, which breaks down to $300 per year or $25 per month. Since the policy covers 36 months, and the buyer is assuming this policy, they will bear the cost of the next $25 beginning in March. At closing, the proration for the insurance, since it’s an expense the buyer assumes, is accounted for as a debit. However, the seller