Proration & real estate taxes paid at time of sale

[americantax]

I have a client who sold their primary residence in Illinois, the client paid county taxes of 4020.84 and 2013 real estate tax proration for 2013 13590.73 the closing was done in 04/18/2014. The question is are they allowed to deduct those 2 amounts as real estate taxes paid?

Thank you.

[Roland Slugg]

A taxpayer may deduct real estate taxes he pays during the year. This includes prorated taxes paid when real estate is bought or sold. If prorated taxes are a credit, that credit is taxable income if it is the recovery of taxes deducted on the prior year's return and resulted in a tax benefit. If property taxes are paid late, there are penalties added, and those penalties are not deductible.

[americantax]

Thank you Roland.

The credit for the proration is on the buyer side, the seller is my client. So because it was paid by the seller, they would be able to deduct it? And for future reference, if the buyer was my client where would the proration credit be used as income on their tax return?

[Burke]

You have to review the HUD-1 closely to see what the real estate tax data is. Often, also, there are unpaid real estate taxes shown on the second page if the seller had not paid the past due ones at the time of the sale. Note Roland's comment that interest and penalties are not deductible.

Generally, the seller has a pro-rated debit or credit on the front page which indicates he is (1) paying (included in Deducted from Gross Proceeds due the Seller) the amount due from the last due date up until the closing date; OR (2) he is getting a credit for taxes paid beyond the date of closing (would be added to Gross Proceeds Due the Seller.) If there is a credit, I show the amounts actually paid by the seller on the Real Estate Tax worksheet, and show the credit on another line as a minus.

To answer your question about the buyer, I usually do the same thing. It is an adjustment on the tax worksheet for the current year. This if the buyer and/or seller itemizes. If not, its an item of income.

[Lion]

Does the new owner have to own the house when the taxes are due to deduct them? In other words, if he pays past due taxes from a time prior to his ownership, are those taxes deductible for him?

[Burke]

I am going to revise my answer based on a re-reading of your post. If your client is paying past due taxes from a time prior to his ownership, why would he do that? IRS instructions for deducting real estate taxes say "on a house you own."

Is this an adjustment on a HUD-1 in which he is buying the house? I would think he would have to be either legally liable for them, or paying them as a requirement in order to purchase the home. And in that case, it would be part of the purchase price. Whether he could make a case for deducting them as real estate taxes on Schedule A since he would own the house as of the date of closing, which is when they would be paid, is an interesting posit.

[FEDUKE404]

House sales and property tax issues

My limited understanding, subject to any lawyerly input, is that the owner of the house is legally liable for payment of property taxes.

In most cases where property is transferred (and relevant taxes have been paid by old owner or will be paid by new owner), there are two scenarios:

1 - If old owner has already paid the full year property taxes, that owner shows on his taxes whatever he "paid" but the amount is reduced by whatever he was reimbursed by the new owner at the time of closing. The new owner, although he never paid anything directly to the taxing authority (and the tax reciept likely has the old owner's name on it!), gets to deduct the partial year taxes paid at the time of closing on his own tax return.

2 - If new owner has an upcoming property tax bill (and he is liable for full payment), he pays the bill but must also reduce his deduction by the amount he was reimbursed at the time of closing by the previous owner. This is the reverse of #1: The old owner has NO "receipt" (other than HUD-1) and even though the new owner will likely eventually have a "365-day" receipt he cannot deduct everything he paid even though shown on the tax bill with his name.

Where things get muddy is if some interim property tax adjustments were not made at the time of closing (extremely unlikely!!) or if there was a "price adjustment" for taxes agreed upon by both parties.

The other red herring out there is that some folks confuse required escrow payments as being "true" payments.

(And having a working knowledge of the types of entries on a HUD-1 helps greatly. . .)

Hope this helps.

FE

[mactoolsix]

Does the new owner have to own the house when the taxes are due to deduct them? In other words, if he pays past due taxes from a time prior to his ownership, are those taxes deductible for him?

Past due taxes paid by the buyer, as well as any other costs paid by the buyer on behalf of the seller, are added to basis. The buyer paid the selling price plus the sellers past due debt.

Mike