June 2025
Understanding Cash vs. Accrual Tax Proration
In my career at Hiffman, I’ve found that some of the biggest insights in our industry don’t come from textbooks or certifications — they come from working real deals, having uncomfortable conversations, and asking “dumb” questions until you actually get it. One topic I came to realize earlier in my career is how property tax proration — specifically the difference between cash vs. accrual basis accounting — can swing a deal by six figures.
If you’re buying or selling a commercial building in Illinois or other states that pay taxes in arrears, you need to understand how this works. It’s not just an accounting preference; it can drastically affect net proceeds to your seller.
Let me break it down.
The Basics: Accrual vs. Cash in Property Tax Proration
In states like Illinois, property taxes are paid in arrears. That means in 2025, you’re actually paying the 2024 taxes. So, if a seller owns a building all throughout 2024 and sells it in early 2025, they technically still owe the 2024 property tax bill — even though that bill is getting paid via a credit when the new owner takes possession.
Here’s where accrual vs. cash basis tax treatment matters.
Accrual basis: Taxes are prorated based on when they were incurred, not when they’re paid. So, in a sale closing in 2025, the seller gives the buyer a credit for 2024 taxes — the taxes accrued while the seller owned the asset, and also pro-rates the taxes for their period of 2025 ownership.
Cash basis: Seller is only prorating the taxes for the period of 2025 that they owned the building. That means the buyer pays the 2024 tax bill (due in 2025), even though they didn’t own the asset during 2024. The seller doesn’t credit the buyer for those taxes.
Why It Matters
Let’s say you’re selling a $5 million building in Illinois in 2025. If your deal is done on an accrual basis, and the 2024 tax bill is $200,000, you (as the seller) credit that amount to the buyer at closing. Net proceeds? $4.8 million.
But if your deal is on a cash basis, you keep that $200,000 and only prorate the taxes until sell it. For example, if you sold the building 2/1/25, you would only prorate 1/12 of the 2025 taxes and not credit the $200,000 for 2024 at closing. That’s a six-figure swing — and that’s just one line item on a closing statement.
What’s Customary?
Accrual or Cash – how do you decide? It comes down to asset type, lease structure, and size of transaction. You see cash basis used for the industrial and retail sectors much more than the office market. If you have a stabilized property that passes through the tax expense to tenants, you typically see cash as opposed to accrual in 100% vacant buildings. Lastly, the size of the transaction comes into play. Larger transactions that are more institutional-based tend to be on a cash basis, as smaller transactions tend to lean towards accrual.
What Should Buyers and Sellers Do?
Sellers: Be upfront about how you want to treat taxes. If you’re going cash basis, put it in the LOI/Offering Memorandum or let your broker handle that early in the discussions. It’s your call — but being transparent helps to avoid roadblocks during contract negotiation.
If you purchased on an accrual basis and sold on a cash basis you increased profit, if you bought on a cash basis and sold on an accrual basis you lose profit.
Buyers: Always ask how taxes are being handled before you submit an offer. If you’re underwriting a credit at closing for prior year’s taxes and the seller is pushing cash proration, your cash at closing will be off. It’s not just semantics — it’s your bottom line.
Should We Talk About It?
Yes. This topic is still not talked about enough — especially among younger brokers and newer investors. It’s almost like a hidden secret that can quietly shift a deal by six figures.
Whether you’re a buyer, seller, broker, or advisor — if you’re not dialed into how tax proration is being treated at closing, you’re not seeing the full picture.
We spend so much time negotiating the headline sale price — but the net price, after credits and prorations, is what really matters.
About NAI Hiffman:
NAI Hiffman is one of the largest independent commercial real estate services firms in the US, with a primary focus on metropolitan Chicago, and part of the NAI Global network. We provide institutional and private leasing, tenant representation, capital markets, project services, research, and marketing services for owners and occupiers of commercial real estate. To meet our clients’ growing needs outside of our exclusive NAI Hiffman territory, we launched Hiffman National, our dedicated property management division, which provides facility management, accounting, lease administration, lender services and project services across the country. NAI Hiffman | Hiffman National is an award winning company headquartered in suburban Chicago, with more than 275 employees strategically located throughout North America.
About Hiffman National:
Hiffman National is one of the US’s largest independent commercial real estate property management firms, providing institutional and private clients exceptional customized solutions for property management, project management, property accounting, lease administration, marketing, and research. The firm’s comprehensive property management platform and attentive approach to service contribute to successful life-long relationships and client satisfaction. As a nationally bestowed Top Workplace, and recognized CRE award winner, Hiffman National is headquartered in suburban Chicago, with more than 275 employees nationally and an additional six hub locations and 25 satellite offices across North America.
