Studying TTB

[JG EA]

I am studying TheTaxBook as fast as possible. Some questions have come to mind and I just need to run this by someone. I suddenly got confused.

On page 4-10 it discusses the closing statement from a seller's point of view for payment of taxes. From the buyer's point of view if the buyer paid a specified amount for property, received a credit for taxes that he'll get a bill for later (the credit is for the prorated sellers part) and therefore hands over the purchase price plus closing costs minus these prorated taxes - Do I:

a. subtract this credit amount from the taxes that buyer will pay later (the way I've been doing) or
b. reduce the purchase price?

Telephone credit question:
In the information it seems to me that it means if someone had a phone with these kinds of taxes even just a !!couple of months!! in the time period of after 02/28/03 - 08/01/06 then they can take one line credit. Is that what you think?

Thanks,
JG

[Gene V]

Telephone credit question:
In the information it seems to me that it means if someone had a phone with these kinds of taxes even just a !!couple of months!! in the time period of after 02/28/03 - 08/01/06 then they can take one line credit. Is that what you think?

According to IRS TaxTalkToday—you get the full standard credit, as long as you paid long distance tax any month during the period—it didn’t matter how many months you paid.

Haven’t got my book yet, so wouldn’t comment on your first question.

[Uncle Sam]

Studying TTB

received a credit for taxes that he'll get a bill for later

I don't understand that. Usually, the buyer pays back to the seller the SELLER'S prepaid taxes and that's paid to the seller IN ADDITION to the property price.

What I do in that instance is add that to real estate taxes - it has nothing to do with purchase price.

[Brad Imsdahl]

The two examples on page 4-10 explains the difference. Only in the second example is the sale price of the home adjusted. That is because in the second example, there is no credit for pre-paid taxes given back to the seller at closing. The seller agrees to pay the full taxes for the year, even though he is not liable for them. I rarely see that situation in real life, although I suppose it happens.

The first example is the more common one. The seller pays the taxes for the year prior to selling the house. Then at closing, he gets a credit back for taxes paid during the time period he will no longer own the house. Nothing is said about adjusting the sales price of the house in example 1. That is because you simply adjust the property tax deduction for each. The seller reduces his property tax deduction by the amount he is credited back at closing, and the buyer increases his property tax deduction since that credit back to the seller is an additional cost to the buyer.

None of the examples illustrate the situation where the seller does not pay all the property taxes by the time of closing. Obviously, when the seller has his sale price reduced for unpaid property taxes at closing, that will increase the sellers real estate tax deduction and reduce the buyers real estate tax deduction.

[Snaggletooth]

State to State

I would think state & local property taxes are governed by state law. Old Jack probably sees a lot of Missouri closing statements.

In Tennessee (also Alabama), buyers are liable for the entire property tax at such time as it is due. Hence, they receive a prorated credit which reimburses them for assuming the entire years' liability. Most people I've dealt with in other states tell me it operates the same way for their state. But I can't speak for all 50 states.

[Joe Btfsplk]

Taxes on HUD Settlement Statements page 6-2 TTB

Take a look at a HUD settlement statement. If you don't have a copy handy go to:

http://www.hudclips.org/sub_nonhud/html/pdfforms/1.pdf

Lines 106 and 107 are taxes charged to the buyer and the buyer can deduct them. Lines 406 and 407 are taxes added to the sellers settlement which means the buyer pays the seller for these taxes.

The buyer can add lines 106 and 107 to his deductible taxes on Schedule A.
The seller's ad valorem tax bill will include this, but he should deduct the buyers reimbursement from his deduction on Schedule A.

See page 6-2 of the Tax Book for a lot more information on settlement statements.

Lines 210 and 211 are the other side of the coin. The Buyer should subtract these items since the seller's settlement is reduced which has the effect of this tax being paid by the seller (and is deducted from the cost to the buyer and added to reductions to the seller--lines 220 & 520.

[JG EA]

Thanks so much

Thanks everyone for answering my questions.
JG