A Little Help on Purchase Escrow Statements

[Unregistered]

Hello,

A friend helped us to figured out basis and operating expenses of rental property just acquired in 05. On page 1 of the escrow, there is an adjustment labeled "Adjustments for Items Unpaid By Seller:
County Taxes 01/01/05-02/10/05: $100.00 Our friend minus this amount from operating expense while I think it should be a plus item. Specifically, here is how she did it:

Second page of the escrow:

Interest 200.00
Insurance 800.00
HOA Dues 300.00

Total 1300
Then minus 100 (the county taxes above)
Total operating Expense 1200

She instructed us to put this $1200 to Schedule E expenses. Assuming no other expenses, I believe our rental expenses should be $1400, instead of $1200.

I appreciate your help.

[Bees Knees]

The county taxes unpaid by seller means the county taxes for 2005 were not due yet at the time of closing on 2/10/05. Therefore, when the buyer eventually paid the county taxes for 2005, the buyer paid the full amount for the year. Since the buyer is not liable for the taxes for the entire year, the closing statement gave the buyer an adjustment which reduced the amount due to the seller. So this amount should reduce the deduction that the buyer takes for total property taxes paid.

As to the escrow funds, you DO NOT deduct the amount from the closing statement for interest, taxes, or insurance. These amounts are put into escrow so that the mortgage company can use these funds to pay the expenses when they come due. So rather than deduct the funds put into escrow, the taxpayer should deduct the actual amount of the expense that was paid when the mortgage company took money out of escrow to pay these expenses.

[Unregistered]

Unpaid County Tax

Thanks so much for your help. It makes sense. The expenses that they withheld were eventually paid in 05. But what should I do with the estate tax credit of $100, does it reduce the basis of the property? if not, should it be a credit of expense on Schedule E since during 2005, there wasn't any property tax paid at all except the $100 credit from the escrow statement.

By the way, it wasn't my escrow, it was a client, and he is a very detailed person, I doubt that he missed property tax paid.

Thanks a lot!

[abby]

As to the escrow funds, you DO NOT deduct the amount from the closing statement for interest, taxes, or insurance. These amounts are put into escrow so that the mortgage company can use these funds to pay the expenses when they come due. So rather than deduct the funds put into escrow, the taxpayer should deduct the actual amount of the expense that was paid when the mortgage company took money out of escrow to pay these expenses.

I agree that the Reserves kept by the loan company are not deduted until paid out of the escrow kept by the loan co - but these amounts could well be actual amounts owed and paid out of closing - the first year of insurance often is paid this way - and HOA dues are also prorated at closing quite often - and then they would, in fact, be deducted on schedule E - except the interest, which is likely already included in the 1098.

It is true that these expenses are usually on page one, so these may be Reserves - but the page two will usually identify them as just that - Reserves - so that'd be the first thing I'd check.

[Bees Knees]

Thanks so much for your help. It makes sense. The expenses that they withheld were eventually paid in 05. But what should I do with the estate tax credit of $100, does it reduce the basis of the property? if not, should it be a credit of expense on Schedule E since during 2005, there wasn't any property tax paid at all except the $100 credit from the escrow statement.

I can't believe there were no real estate taxes paid in 2005. Ask your client to check again. Sounds like the mortgage company was using funds from the escrow account to pay these expenses, so have the client double check to see whether taxes were really paid through escrow.

If taxes really were not paid at all in 2005 for some strange reason, I guess I would tend to just lump the $100 credit in with other expenses and call it a negative adjustment.

[Bees Knees]

I agree that the Reserves kept by the loan company are not deduted until paid out of the escrow kept by the loan co - but these amounts could well be actual amounts owed and paid out of closing - the first year of insurance often is paid this way - and HOA dues are also prorated at closing quite often - and then they would, in fact, be deducted on schedule E - except the interest, which is likely already included in the 1098.

I agree.

In Minnesota, when we see interest, taxes, and insurance on page 2 of the closing statement in the middle section, they are always escrow amounts. Any adjustments or dispersments for actual expenses paid are always on page one as amounts unpaid by seller or buyer. So I assumed the original poster meant these were escrow amounts.

[Unregistered]

Thanks

Thanks for your guys input.

Yes I refer back to the escrow statement again, on the middle section of page 2, there is a line called "reserves deposited with lender."

Also I agree that it does look right that during the whole year there wasn't any real estate tax paid. I will check with my client again. He is in "partnership" with several people in Washington state so maybe his "partners" paid those expenses.

Have a good day.