Indiana help

[JON]

Real estate tax deduction on the state return. Assessed 2007, 2008 or 2009?? What and where do I get the correct numbers. I have one who moved there rented for a while, I know the rent paid, purchases a house that on the closing statement gives him a CREDIT for about $1,700 for a time period from 2008 to his purchase 8/15/09. Do not have a real estate statement, but the mortgage interest statement 1098 shows real estate taxes paid of $698. What and how do you calculate the real estate taxes deductable on the state return.

Thank you.

[Koss]

Real Estate Tax

I'm not from Indiana, but I'm gonna take a crack at this one...

In most states, real estate tax is paid in arrears, with a lag of either six months or an entire year. For example, here in central Ohio, the property tax payment due in January, 2010 was for the period of time from January 1 to June 30 of 2009.

This result is controlled chaos when the property is sold. In this example, if the property is sold in November, 2009, the new owner is legally obligated to pay property tax on the due date of January 20, 2010... but the tax due is for a period of time when the person did not own the property. Nevertheless, it is the owner on the due date that must pay the tax.

Therefore, in this example, at the closing, the seller pays the buyer a pro-rated amount of property tax, to cover the payment that is due in the future, for a period of time that is in the past. In this example, with a closing date of November 15, the seller would pay the buyer the amount of property tax due for the period from January 1 to November 15. The new owner then has to pay part of that amount on January 20, 1010, and part of the amount on July 20, 2010...

This explains why your client's closing statement shows a credit. It is effectively a reimbursement by the seller for property tax that the buyer had to pay, for a period of time during which he did not own the house.

The result is that your client didn't really pay that tax, because he was reimbursed by the seller. To be sure, the tax was paid by his mortgage lender, because he was the owner of the property on the due date. But he recovered the amount paid at the closing.

The outcome is that in most states, in most cases, the buyer of a home does not get a property tax deduction for the first calendar year that they own the home. The taxes paid during that first year are for an earlier year during which they did not own the home, and they have been reimbursed for those taxes by the previous owner.

If this makes any sense to you, you'll need to find out what period of time is involved in your client's situation. In other words, the tax paid to the county out of his lender's escrow account--what period was it for? If it was for a period of time before he bought the house, then he didn't really pay it. He was reimbursed at the closing, so he has no deduction.

Hope this helps. The same basic issue arises with respect to deducting property tax on Schedule A of the federal return.

BMK

[Bonnie]

So where in Ohio are you? I was originally from central Ohio.

[Koss]

Central Ohio

I'm in Columbus...

BMK

[JON]

I agree

but the software in Indiana for deduction has two blanks- assessed 2008 and assessed 2009. So is the State deduction different than the 1040 Schedule A?? If you code the Schedule A deduction to IN it comes across as a deduction to the State.

[gkaiseril]

As noted may states or counties pay real estate taxes in arrears or for the past year of ownership. This started in the Great Depression as a way for counties to 'help' those affected by the economic downturn. Some counties changed from paying the taxes for the current year of residence to the prior year of residence giving the property owner one year grace from the tax and time to save enough money to pay the tax. They just have not figured out how to get out of this situation.