Need Illinois Preparer Input

[Beth]

I have a client who lives in Illinois and sold her home late in 2007. She is being told by a third party (an accountant) that her property taxes for 2008 also get to be deducted because what is paid in 2008 is for 2007. In essence, since she sold in Nov, the result is that her property tax deduction would be nearly twice the usual.

They are relying on the statement : "You are treated as paying the taxes up to, but not including, the date of sale. You can deduct these taxes as an itemized deduction on Schedule A (Form 1040) in the year of sale. It does not matter what part of the taxes you actually paid. "


I contend she can only deduct what is paid- am I missing something??

[Jesse]

Check the closing statement to see if the buyer was credited for the property taxes. This is typically how it is done and the end result is the seller, by giving the credit, paid their portion of the property taxes. See TTB page 4-10.

Not from IL so I'm not sure how the property tax is structured in your area. We usually get the tax bill in Dec and can opt to pay in 2007 or in 2008. If we pay in 2008 we claim RE taxes for 2007 on tax return in 2008.

However, again since the credit is given when the house is sold even though the seller does not actually pay the bill the credit should have been received and treated as paid by the seller.

Does this make sense or am I just rambling on............?

[Koss]

Time Period

The issue that causes confusion is that property tax payments are almost never for the current period. Depending on the state, the payment may be for a period that was six months prior, a year earlier, or even a period of time that is later than the payment date. In some states, it can even very by county.

Your client sold their house in 2007. At some point during 2008, the new owner is going to get a property tax bill that reflects taxes on the house for the period of time from 07/01/07 to 12/31/07. Or something like that. The new owner is legally liable for this tax, and is required to pay it, because they own the house on the date the tax is due.

But the tax is for a period of time during which they did not own the house. That's not really fair, to put it mildly.

So the closing agent prorates the taxes, based on the date of sale. At at the closing, the seller pays the buyer the amount of real estate tax that the buyer will later pay, for that period of time during which the property was still owned by the seller.

This amount is effectively paid by the seller, during 2007, and it is deductible for the seller.

My reference above to the dates of 07/01 through 12/31 was meant to be an example only. As the previous post noted, you have to look at the closing statement. If the sale took place on 09/15, then the closing statement would have an amount identified as "real estate tax from 07/01/07 to 09/15/07." And it will show that this amount was paid by the seller and credited to the buyer. The amount will show up in both the buyer and the seller side of the closing statement, but on the seller side it should be a negative number.

Hope this helps.

FYI: In this example, the buyer may mistakenly take a deduction on Schedule A for the amount in question on their 2008 tax return. This is particularly likely if the buyer is not using the escrow method, and actually had to write a check for the property tax bill during the first part of 2008. The buyer suffers from the some confusion, and may never fully grasp the fact that they were effectively reimbursed for the tax bill in question, way back at the closing. Of course they never actually saw the money, because it was simply wrapped into the entire transaction. In a way, it reduced their downpayment.