Difficulty: Medium

Average Score: 67%

Real estate taxes that are paid in advance are prorated on the closing statement as

Rationale

a credit to buyer; a debit to seller.

When real estate taxes are paid in advance, they represent an expense that the seller has already covered for a period that the buyer will also benefit from after the closing date. Therefore, the buyer receives a credit for their share of the prepaid taxes, while the seller incurs a debit for the amount that the buyer is entitled to reimburse.

A (no entry to buyer; a credit to seller.) YOUR ANSWER

This choice incorrectly suggests that there is no financial entry for the buyer. In reality, the buyer should receive a credit for the prepaid taxes, reflecting their share of the expense incurred by the seller.

B (no entry to buyer; a debit to seller.) YOUR ANSWER

Similar to option A, this choice fails to account for the buyer's credit. While it correctly identifies that the seller incurs a debit, it inaccurately implies that the buyer has no entry, which contradicts the need to adjust for the prepaid taxes.

C (a credit to buyer; a debit to seller.) CORRECT

This option correctly states that the buyer receives a credit for the prepaid taxes and the seller incurs a debit. This accurately reflects the financial adjustments necessary at closing to account for the taxes that the seller has already paid for the period during which the buyer will occupy the property.

D (a debit to buyer; a credit to seller.) YOUR ANSWER

This choice inaccurately assigns a debit to the buyer instead of a credit. In the case of prepaid taxes, the buyer should not be charged; instead, they should receive a credit for their share, while the seller is debited for the amount they have already paid on behalf of the buyer.

Conclusion

In real estate transactions, when taxes are paid in advance, it is essential to prorate these expenses accurately. The buyer receives a credit for the prepaid taxes, acknowledging their share of the expense, while the seller is debited for that amount, reflecting their upfront payment. Understanding these adjustments is crucial for ensuring a fair and accurate closing statement.

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