Real Estate Taxes- Deduction vs Basis Addition

[Taxman VA]

Client moved in to a residence in 08/2010 in which their names were on the deed and they were paying the mortgage to VA Community Bank. On the note, the company that built the property and was renting it out before they took occupancy, was their information. This company paid the insurance and said don't worry about the real estate taxes b/c you will refinance in a while and it can be taken care of them. Well, not so easy and bad advice. Most counties rely on real estate tax revenue and this county in VA was no different. Client was notified a lien had been placed and a garnishment was next on her pay until back taxes were current. In April of last year (2011) client paid all back taxes and then refinanced the property so the note was updated to include hers and her husband names. Stay with me as this information is necessary and to see if you agree with me.

I think the Real estate taxes from Aug/2010 forward paid in 2011 should be a deduction on Schedule A and the taxes prior to their occupancy should be added to the basis. I know their names were only on the deed but as far as the county was concerned they were liable. Besides, they included the mortgage interest on their 2010 tax return b/c they paid it.

What do you think?

[appelman]

The important date is the closing date.

Or whatever passes for such in this transaction. Taxes paid from that date forward are deductions; prior tax payments are added to the purchase price. Or is there perhaps something else about this transaction that concerns you?

[Burke]

I think the Real estate taxes from Aug/2010 forward paid in 2011 should be a deduction on Schedule A and the taxes prior to their occupancy should be added to the basis. I know their names were only on the deed but as far as the county was concerned they were liable. Besides, they included the mortgage interest on their 2010 tax return b/c they paid it.
What do you think?

I agree with Appelman. If their "name was on the deed" they owned the property, and all real estate taxes due and paid since they owned it are deductible on Sche A. Are you saying the county charged them for back RE taxes for the period of time while it was owned by the builder? The occupany factor should not be an issue. The ownership is.

[Taxman VA]

Real Estate Tax Deductibility

Burke & Appelman- Thanks for your replies.

The couple moved in Aug 2010 and their names were placed on the deed. They began making mortgage payments to VA Community Bank. They actually refinanced the home in Jul 2011. For some reason, the builder who had the construction loan initially couldn't sell the property so he rented it out. When my clients came in the picture they wanted it to become their primary residence as they just moved from one so they could rent it.

My position is the reals estate taxes from when their names were on the deed until the refinance are theirs to claim on Sched A. The county apparently missed this one big time as the property was available to be rented in the second half of 2008 and why they didn't come after the builder for the real estate taxes is a mystery to me. Those back taxes paid by my clients definitely are an add to the basis. I just want them to get credit from Aug 2010 forward.

Does this help? Let me know what you think.

Thanks again,

Taxman VA

[Burke]

Normally in these cases, the builder is debited for the unpaid real estate taxes on the HUD-1 and the money is transferred to the owner's side as a credit. Is this what happened? If they paid them in cash (ck), I suppose the only recourse is to add those to basis. They shouldn't have paid them, but I guess that is water under the bridge. As for the taxes since 8/2010, deduct on Sche A.

[Burke]

I think the Real estate taxes from Aug/2010 forward paid in 2011 should be a deduction on Schedule A and the taxes prior to their occupancy should be added to the basis. I know their names were only on the deed but as far as the county was concerned they were liable.

If "their names were put on the deed," then ownership and title were legally transferred to them from the builder as of that date, whatever that was. This is highly irregular, as there appears to have been no closing or contract for sale? Then they began paying the builder's note? The county is correct in going after them for the taxes, but the TP's may have a case against the builder too, for the portion which was due prior to their purchase. There was no title search? No title insurance? The outstanding taxes would have been picked up if one were done.