California Real Estate Practice Exam

In escrow, prepaid taxes, assessments, or insurance credited to the seller are also a debit to?

1. The seller

2. The buyer

3. The escrow company

4. The insurance company

The correct answer is: The buyer

In a real estate transaction, escrow is used to facilitate the process between buyers and sellers, ensuring that all terms of the agreement are met before finalizing the sale. When it comes to prepaid items such as taxes, assessments, or insurance, these expenses can impact both the buyer and the seller in different ways. When prepaid taxes or insurance are credited to the seller during the escrow process, they represent a reimbursement for expenses that the seller has paid in advance for a period extending beyond the closing date. As a result, these costs become a debit to the buyer because they are now responsible for these prorated expenses starting from the closing date. Essentially, the buyer will reimburse the seller for the portion of the cost that applies to the time the buyer will own the property after closing. Understanding this financial flow is essential for determining how costs are allocated in real estate transactions. It is important for buyers to recognize their obligations to reimburse the seller for these prepaid amounts.