Prop tax allocation

[Unregistered]

Client bought rental property on 02/25/2005 - apt bldg.

On closing stmt:

County tax---01/01/04 - 12/31/04........$5000
County tax---01/01/05 - 02/25/05........$785

I think I need to ignore it and should not include on sch "E" as client will pay in 2006 and include at that time. Can some one please confirm?

Thanks.

[Bird Legs]

Rent Property/R E Tax

It appears that the real estate taxes for the year 2004 were not paid and that your
client paid them at closing, along with the prorated taxes from 1-1- 5 thru 2-25-05.
Your client should have a Sched. E deduction for property taxes for the combined two
amounts.

[Jesse]

Depends

By this I assume your client received credit for the property taxes, so in effect when he pays the property tax he needs to reduce by the amount he was credited.

In our county we receive our property tax bill in December and have the option to pay 1/2 by 1/31 and the 2nd 1/2 by 7/31.

So if I rceive a tax bill for $5,000 and and pay it in 2006 I would need to reduce the amount of tax by the $785 that I received credit for on closing.

All States/counties are different.

[rosieea]

Hasn't he already paid them by virtue of their being included in his closing costs?

[Unregistered]

By this I assume your client received credit for the property taxes, so in effect when he pays the property tax he needs to reduce by the amount he was credited.

In our county we receive our property tax bill in December and have the option to pay 1/2 by 1/31 and the 2nd 1/2 by 7/31.

So if I rceive a tax bill for $5,000 and and pay it in 2006 I would need to reduce the amount of tax by the $785 that I received credit for on closing.

All States/counties are different.

You are right he did receive credit for these taxes on closing statement. This means he can not include on Sch "E", right?

[Unregistered]

Hasn't he already paid them by virtue of their being included in his closing costs?

It is not part of his closing costs.

[Jesse]

You are right he did receive credit for these taxes on closing statement. This means he can not include on Sch "E", right?

I would say you are right, he cannot include the amounts on Sch E because he did not pay the taxes, but was given credit for the taxes for the period he did not own the property.

[Matt Sova]

Depends where they are

If the property taxes are added to the purchase price then the property taxes where it is are paid in advance and your client is reimbursing the seller for the taxes that they paid. Your client will then take those taxes on his schedule E.

If the property taxes are part of the amounts for the buyer (below the purchase price) then the property taxes are paid in arrears and your client will subtract this amount from the total taxes they pay after purchasing the property.

[pmedders]

Property Taxes

In IRS Pub. 551, it states that if you pay the real estate taxes the seller owed on real property you bought and the seller did not reimburse you, treat those taxes as part of your basis. You cannot deduct them as taxes. Does this not apply to rental property? I have the same situation with a client buying rental property and taxes were added to mortgage? After reading pub. 551, I did not add the taxes on schedule E. Am I misinterpretating?

[Gretel]

The way I understand it, is that back taxes are added to the basis and current taxes are a deduction if paid by buyer.

[Jesse]

if you pay the real estate taxes the seller owed on real property you bought and the seller did not reimburse you, treat those taxes as part of your basis.

In your senerio I take it the seller did reimburse you by way of credits on the closing statement. If the 2004 taxes were not yet due or delinquent you now have to pay the taxes but did in effect receive the money to pay the taxes by way of credit on the closing statement. The 2005 tax was also credited to the buyer for the time he did not own the property, again in effect being reimbursed by the seller.