Settlement Costs for the Farmland Seller

[Sherill]

On 6-2 Treatment of settlement Costs. . .
1- Client sold 80 acres, has a basis of 13,200, but wants to claim all interest(4800) and real estate taxes(6000) he has paid for 27 years! Huh?
What specifically is meant by DEDUCTIBLE UP TO, BUT NOT INCLUDING THE DATE OF SALE? Does this mean only for one year or all years that he has had ownership?
2-Reduce amt realized(title ins./ect of 1081) would then come off from the selling price(60,000)?
I love The TaxBook and this site!!!!!!!!! Thank you.

[Bees Knees]

What specifically is meant by DEDUCTIBLE UP TO, BUT NOT INCLUDING THE DATE OF SALE? Does this mean only for one year or all years that he has had ownership?

It refers only to the year of sale. The seller cannot deduct real estate taxes paid for the day of and any period after the date of sale. The purchaser cannot deduct real estate taxes paid prior to the date of sale.

For example, the seller agrees to pay up all real estate taxes for the year. The seller can only deduct taxes during the year for the period up to, but not including the date of sale. The allocable portion of taxes paid starting on the date of sale and after are considered a reduction in the sales price.

Example. Sale price = $100,000
Basis = $40,000
RE taxes for year = $1,000
RE taxes allocated to the period prior to the date of sale = $400

Assume seller pays the entire $1,000 of RE taxes for the year. He can only deduct $400 of it. The other $600 reduces the sale price to $99,400.

Gain on sale = $59,400

Without the rule, gain would be $60,000 (which could potentially receive favorable capital gain treatment) and the ordinary deduction for RE taxes would be $1,000.

What it does is shifts a deduction against ordinary income to a reduction in potential capital gain.