Property taxes shown as settlement expenses

[RWG1950]

My customers (MFJ) sold their residence in 2022. On the closing statement, prorated property taxes are shown among the closing expenses.
Can these taxes be added to the basis of the home sold or can they be part of the closing expenses of the sale? They will not be itemizing.
They had deferred form 2119 gain from 1996 & this is a million dollar sale, so even after the $500-K 121 exclusion, they'll still have some LTCG.
Thanks for comments

[TAXNJ]

see summary:
chart pg 6-2

6-2Investment IncomeTheTaxBook™—2022 Tax YearTax Treatment of Settlement Costs on Purchase or Sale of Real Estate

[New York Enrolled Agent]

My customers (MFJ) sold their residence in 2022. On the closing statement, prorated property taxes are shown among the closing expenses.
Can these taxes be added to the basis of the home sold or can they be part of the closing expenses of the sale? They will not be itemizing.
They had deferred form 2119 gain from 1996 & this is a million dollar sale, so even after the $500-K 121 exclusion, they'll still have some LTCG.
Thanks for comments

Typically on a sale the prorated property taxes are a reduction in the amount of real estate taxes already paid by the seller. Is that the situation? If that's the case it's not an expense

[Rapid Robert]

"Can these taxes be added to the basis of the home sold or can they be part of the closing expenses of the sale?"

No, and no.

"They will not be itemizing"

Oh, so they will already be getting a bigger deduction than what they actually paid, that's a sweet deal for them!

"prorated property taxes are [typically] a reduction in the amount of real estate taxes already paid by the seller."

But it can go the other way too. Where I am, the property tax year is July 1 - Jun 30, payable in two installments due on Dec 1 and Apr 1. So if the home is sold in, say, October, there will be additional prorated tax increase to the seller for the taxes July - October that have not been paid yet, and will be paid by the buyer. But I know that in some jurisdictions, property tax is paid in arrears, so you really just have to pay attention to whether it is a credit or debit on the closing statement, as it can go either way.

[RWG1950]

In my locale (Wisconsin) our property taxes are paid in arrears in that our 2022 tax bills are received in December and payable 1/2 in January & 1/2 in July 2023.
The property taxes shown on the closing statement are based on the number of ownership days and reduce the sellers gross sales proceeds - so they have paid these taxes.
Ordinarily I'd deduct this amount as an itemized deduction but they won't be itemizing.
Was just wondering if these could be used to either increase the cost basis of the sale or be used as selling closing expense.

[Twin Turbo Z]

In my locale (Wisconsin) our property taxes are paid in arrears in that our 2022 tax bills are received in December and payable 1/2 in January & 1/2 in July 2023.
The property taxes shown on the closing statement are based on the number of ownership days and reduce the sellers gross sales proceeds - so they have paid these taxes.
Ordinarily I'd deduct this amount as an itemized deduction but they won't be itemizing.
Was just wondering if these could be used to either increase the cost basis of the sale or be used as selling closing expense.

Any prorated taxes the seller pays at closing, we use as a selling expense to help offset any gain.

[FEDUKE404]

Any prorated taxes the seller pays at closing, we use as a selling expense to help offset any gain.

Rather curious as to how you (apparently) can justify routinely calling property taxes a "selling expense."

Just this month I had a closing statement where the property taxes for the entire year were shown as "cost to seller" *AND* there was listed separately on the closing statement a payment by purchaser to seller for the pro-rated taxes Oct-Dec. Within a few weeks of closing, the seller received a property tax bill in the mail. He essentially ignored it, without consequence.
The more common scenario, especially for early year sales, is the seller reimburses the buyer, at time of closing, the projected apportioned tax cost for Jan through date of sale. The buyer, who as owner is responsible for payment of property taxes, later pays the FULL tax bill when it arrives, but only can deduct that amount reduced by what the seller paid at closing. The seller deducts the amount shown on the closing statement.
I do not recall ever treating ad valorem property tax payments as a basis adjustment. They always go to Schedule A. As Rapid Robert already noted, whether as such they reduce tax liability is a function of the standard deduction.
Of course, with SALT limitations and/or for those who live in high tax locales, I guess there might be an incentive to be a bit more creative as to how you treat real prooerty taxes. . .

FE

[RWG1950]

After consulting with different sources, it seems that the thing to do here is to put the property taxes paid, shown on the closing statement, on schedule"A" (even though this would not benefit them on the Federal return) and not use them as a selling expense or an addition to cost basis.

[Rapid Robert]

"Any prorated taxes the seller pays at closing, we use as a selling expense to help offset any gain."

Then you are preparing inaccurate returns. Do you also similarly add pro-rated mortgage interest shown on the closing statement as a selling expense? Obviously the property tax (and mortgage interest) are exactly the same for the days of ownership whether or not there is a sale, so they clearly cannot be selling expenses.

[terryats]

From pub 523.as others have said property taxes are not an expense.

Settlement costs don’t include amounts placed in escrow for the future payment of items such as taxes and insurance.

Some settlement fees and closing costs you can’t include in your basis are:

• Fire and casualty insurance premiums,

• Rent for occupancy of the house before closing,

• Charges for utilities or other services related to occupancy of the house before closing,

• Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs before 1994),

• Charges connected with getting a mortgage loan, such as:
  1. Mortgage insurance premiums (including funding fees connected with loans guaranteed by the Department of Veterans Affairs),
  2. Loan assumption fees,
  3. Cost of a credit report,
  4. Fee for an appraisal required by a lender,
  5. Points (discount points, loan origination fees), and
• Fees for refinancing a mortgage.