Rental unit -- local property taxes

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Couldn't find an answer anywhere... So here is my question -- Bought a condo (with cash) as rental property last July 15.  In the closing statement, under the local property tax section, they gave me a credit for an amount that the previous owner was responsible until July 14.  When I subtract this credit from the total annual tax amount, it gives me my share of the property tax (July 15 thru' Dec 31, say $900).   While filing my 2016 taxes, am I allowed to deduct the $900 under the rental property expenses-->taxes-paid section?   

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it's not super clear, to me anyways. this excerpt may or may not be applicable:

"If the seller actually paid for any item... (more)

solarUS (Mar. 30, 2017 @ 10:19a) |

This is a basis issue. The buyer credit reduced the net price of the home that the buyer paid. Doesn't matter how it w... (more)

cestmoi123 (Mar. 30, 2017 @ 10:33a) |

i'm not quite convinced.

"If the seller actually paid for any item for which you are liable and for which you can take a ... (more)

solarUS (Mar. 30, 2017 @ 2:13p) |

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yes

JavaCoder said:   yes
  Thank you Sir!   I wasn't sure at first because the 2016 real estate property taxes are actually paid in 2017 as 2 installments.

rarmortn said:   
JavaCoder said:   yes
  Thank you Sir!   I wasn't sure at first because the 2016 real estate property taxes are actually paid in 2017 as 2 installments.
 

  
The OP didn't say that.    

You generally claim expenses in the year you pay them.    So if you pay the taxes in 2017 then that is when you'd claim the cost.


 

rarmortn said:   
JavaCoder said:   yes
  Thank you Sir!   I wasn't sure at first because the 2016 real estate property taxes are actually paid in 2017 as 2 installments.

 wait...did the title company pre-pay the taxes at closing, or are you personally paying the bill this year only?

because yeah, you only deduct in the year it was actually paid.

We have similar terms in Nebraska. Most likely what was done was the taxes for 2015 but paid in 2016 is what was prorated. Such actions are normal in some areas of the country. Can you deduct it for 2016 when it was paid? Yes. If you look at the county records, see what was actually paid and when. That is where your final answer is.

Talk to your county officials to learn how they label the taxes. Here, it is 2016 taxes .. delinquent on two dates in 2017. Bills are generated in the last few months of 2016. ALL the mortgage companies pay in the two payments just before the delinquent date. Almost nobody pays in December 2016.

Right. Some people play around with when they pay their taxes to maximize their deductions, you could pay it in advance in December and claim it in that year. I guess that makes sense if you're borderline on taking the standard deduction. Take it one year and skip it the next.

solarUS said:   
rarmortn said:   
JavaCoder said:   yes
  Thank you Sir!   I wasn't sure at first because the 2016 real estate property taxes are actually paid in 2017 as 2 installments.

 wait...did the title company pre-pay the taxes at closing, or are you personally paying the bill this year only?

because yeah, you only deduct in the year it was actually paid.

 

  
The title company did NOT pre-pay the 2016 year taxes during closing.  They were only estimating that I'll be paying the 2016 taxes in 2017 BUT since the previous owner owned the property until July 2016, they gave me a pro-rated credit for the days she owned.   So it looks like since I did not pay anything out of my pocket in 2016 for the taxes owed for 2016, I CANNOT deduct it as an expense. Sounds correct?  Thanks so much guys... 

Check your escrow statement. The escrow probably paid it. Hard to believe that you got a mortgage and didn't pay real estate taxes since July, but I don't know how often you have to pay, if it's just once a year, I suppose maybe you didn't actually pay the bill til January. But even still, it should be there, I think you need to look closely at the settlement statement. She got a credit for the days she owed, but you paid for it afterwards. Even if she pre-paid it, you reimbursed her for it so you paid the taxes.

henry33 said:   Check your escrow statement. The escrow probably paid it. Hard to believe that you got a mortgage and didn't pay real estate taxes since July, but I don't know how often you have to pay, if it's just once a year, I suppose maybe you didn't actually pay the bill til January. But even still, it should be there, I think you need to look closely at the settlement statement. She got a credit for the days she owed, but you paid for it afterwards. Even if she pre-paid it, you reimbursed her for it so you paid the taxes.
  
No escrow. No mortgage. that's why i had mentioned 'Bought a condo (with cash)' in OP  Thanks.

I don't think you're reading the settlement statement correctly. The attorney/title company may have paid it because you do mention a total amount. She was given a credit for the taxes that she paid in advance. So it was pro-rated til the closing date at which time you would be responsible for the taxes. That credit is what you ended up paying in taxes.


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henry33 said:   I don't think you're reading the settlement statement correctly. The attorney/title company may have paid it because you do mention a total amount. She was given a credit for the taxes that she paid in advance. So it was pro-rated til the closing date at which time you would be responsible for the taxes. That credit is what you ended up paying in taxes.
  
I've attached the portion of the settlement that doesn't identify me/anyone.  Please advise.

rarmortn said:   
henry33 said:   I don't think you're reading the settlement statement correctly. The attorney/title company may have paid it because you do mention a total amount. She was given a credit for the taxes that she paid in advance. So it was pro-rated til the closing date at which time you would be responsible for the taxes. That credit is what you ended up paying in taxes.
  
I've attached the portion of the settlement that doesn't identify me/anyone.  Please advise.

the seller paid you ~$1200 in anticipation of owing ~$2100 at year's end for 2016 taxes. technically speaking, that $1200 is actually taxable income for you in 2016. Your $900 portion is definitely not deductible. For 2017 then, only if you claimed the $1200 as income in 2016, then you could deduct the $2100.

The alternative approach is to NOT claim the $1200 income for 2016, and just claim the $900 deduction for 2017...but i don't know how kosher that would be for the IRS. I am sitting here wondering if you submitted a property tax form that said $2100 and you only claim $900 if it would raise any red flags (just for correctness, not necessarily evasion or anything)

(i am not a tax accountant!)

rarmortn said:   
henry33 said:   I don't think you're reading the settlement statement correctly. The attorney/title company may have paid it because you do mention a total amount. She was given a credit for the taxes that she paid in advance. So it was pro-rated til the closing date at which time you would be responsible for the taxes. That credit is what you ended up paying in taxes.
  
I've attached the portion of the settlement that doesn't identify me/anyone.  Please advise.

  
I am not sure what state you're in, but it doesn't seem to make too much sense to me. First I'm not sure why the seller had a credit for the time that the seller owned the property, it should be for the time that they didn't own the property. There may be mistakes from the title company. Plus I'm not even sure how all the math works out. Is the local property taxes included the purchase price? Not sure what the convention is in your state. Usually the credits and debits offset each other. But I see the seller getting a credit but where did it come from? It may be in other pages. 

henry33 said:   
rarmortn said:   
henry33 said:   I don't think you're reading the settlement statement correctly. The attorney/title company may have paid it because you do mention a total amount. She was given a credit for the taxes that she paid in advance. So it was pro-rated til the closing date at which time you would be responsible for the taxes. That credit is what you ended up paying in taxes.
  
I've attached the portion of the settlement that doesn't identify me/anyone.  Please advise.

  
I am not sure what state you're in, but it doesn't seem to make too much sense to me. First I'm not sure why the seller had a credit for the time that the seller owned the property, it should be for the time that they didn't own the property. There may be mistakes from the title company. Plus I'm not even sure how all the math works out. Is the local property taxes included the purchase price? Not sure what the convention is in your state. Usually the credits and debits offset each other. But I see the seller getting a credit but where did it come from? It may be in other pages. 

huh? that's a BUYER credit.

OP pays taxes in arrears. seller has to reimburse OP for taxes on the place while the seller lived there in 2016....that OP will [eventually] pay in 2017.

Oh, that makes more sense now. I'm used to looking at the old HUD documents where they split buyer and seller side on the same form. In my state, you pay the taxes in advance. So that settlement statement doesn't actually show any tax payment. You'd have to check with the tax assessor to see when the taxes were paid. If you didn't make any payment in 2016, there's nothing to deduct.

henry33 said:   If you didn't make any payment in 2016, there's nothing to deduct.
 

yes, but as I said above - there may be something to CLAIM. 

solarUS said:   
henry33 said:   If you didn't make any payment in 2016, there's nothing to deduct.
yes, but as I said above - there may be something to CLAIM. 

  
What are you going to claim? If he paid the full tax bill, in theory, the credit offsets the full amount so he's just left with $900. If he didn't pay it, there's nothing to claim. 

henry33 said:   
solarUS said:   
henry33 said:   If you didn't make any payment in 2016, there's nothing to deduct.
yes, but as I said above - there may be something to CLAIM. 

  
What are you going to claim? If he paid the full tax bill, in theory, the credit offsets the full amount so he's just left with $900. If he didn't pay it, there's nothing to claim. 

normally i would ignore this post, because you apparently didnt read my prior post explaining the point.

but you frequently will share useful info, so I will be more charitable

OP received money in tax year 2016 from the seller, toward a tax bill that OP did not pay in 2016. this should be claimed, probably as misc income. For 2017, when OP pays the [whole] tax bill, he/she can claim the whole thing as a deduction.

And again - I am not a tax professional. It may or may not be appropriate (from IRS's perspective) to only claim $900 is 2017 as a deduction, allowing the $1200 prior credit to essentially cancel itself out....but frankly i doubt it.

SolarUS are you saying then that you think he should claim the $1200 as income in 2016 and then deduct the entire property tax bill in 2017?

I don't think thats how it ought to work. The 1200 is part of the house sale transaction and not income. I'd simply claim 900 in 2017.   (The 2100 tax bill less the 1200 seller credit)

I'm not a CPA either.

eta - got my numbers mixed up.   $1200 is the credit seller paid and $2100 is the amount due right?
 

jerosen said:   SolarUS are you saying then that you think he should claim the $1200 as income in 2016 and then deduct the entire property tax bill in 2017?

I don't think thats how it ought to work. The 1200 is part of the house sale transaction and not income. I'd simply claim 900 in 2017.   (The 2100 tax bill less the 1200 seller credit)

I'm not a CPA either.

eta - got my numbers mixed up.   $1200 is the credit seller paid and $2100 is the amount due right?

i agree - it should be simpler, as in your example. but i bet the IRS doesnt see it that way. the IRS sees that unclaimed-as-income $1200 from 2016 as being money they should get in THAT tax year. they will almost assuredly see it as a tax-free one-year loan they gave OP.

solarUS said:   
henry33 said:   
solarUS said:   
henry33 said:   If you didn't make any payment in 2016, there's nothing to deduct.
yes, but as I said above - there may be something to CLAIM. 

  
What are you going to claim? If he paid the full tax bill, in theory, the credit offsets the full amount so he's just left with $900. If he didn't pay it, there's nothing to claim. 

normally i would ignore this post, because you apparently didnt read my prior post explaining the point.

but you frequently will share useful info, so I will be more charitable

OP received money in tax year 2016 from the seller, toward a tax bill that OP did not pay in 2016. this should be claimed, probably as misc income. For 2017, when OP pays the [whole] tax bill, he/she can claim the whole thing as a deduction.

And again - I am not a tax professional. It may or may not be appropriate (from IRS's perspective) to only claim $900 is 2017 as a deduction, allowing the $1200 prior credit to essentially cancel itself out....but frankly i doubt it.

  
I thought we were talking about 2016 taxes. Because he didn't pay taxes in 2016, there'd be nothing to claim. 

It's late and it's a little tricky to figure out. I think you need to play around with your basis. I don't think he claims the credit as income. 

https://www.irs.gov/publications/p530/ar02.html#en_US_2016_publi...
https://www.irs.gov/publications/p530/ar02.html

I think the seller will probably claim the taxes that he gave the buyer the credit for and the buyer is supposed to claim the taxes that he paid. If he didn't pay those taxes in 2016, I think he just claims the $900 for 2017 and also the full amount for 2017. 
 

henry33 said:   
solarUS said:   
henry33 said:   
solarUS said:   
henry33 said:   If you didn't make any payment in 2016, there's nothing to deduct.
yes, but as I said above - there may be something to CLAIM. 

  
What are you going to claim? If he paid the full tax bill, in theory, the credit offsets the full amount so he's just left with $900. If he didn't pay it, there's nothing to claim. 

normally i would ignore this post, because you apparently didnt read my prior post explaining the point.

but you frequently will share useful info, so I will be more charitable

OP received money in tax year 2016 from the seller, toward a tax bill that OP did not pay in 2016. this should be claimed, probably as misc income. For 2017, when OP pays the [whole] tax bill, he/she can claim the whole thing as a deduction.

And again - I am not a tax professional. It may or may not be appropriate (from IRS's perspective) to only claim $900 is 2017 as a deduction, allowing the $1200 prior credit to essentially cancel itself out....but frankly i doubt it.

  
I thought we were talking about 2016 taxes. Because he didn't pay taxes in 2016, there'd be nothing to claim. 

It's late and it's a little tricky to figure out. I think you need to play around with your basis. I don't think he claims the credit as income. 

https://www.irs.gov/publications/p530/ar02.html#en_US_2016_publink100011939
https://www.irs.gov/publications/p530/ar02.html

I think the seller will probably claim the taxes that he gave the buyer the credit for and the buyer is supposed to claim the taxes that he paid. If he didn't pay those taxes in 2016, I think he just claims the $900 for 2017 and also the full amount for 2017. 

it's not super clear, to me anyways. this excerpt may or may not be applicable:

"If the seller actually paid for any item for which you are liable and for which you can take a deduction (such as your share of the real estate taxes for the year of sale), you must reduce your basis by that amount unless you are charged for it in the settlement. " 

i think this refers to when a seller incentivizes the sale by paying buyer's share of the taxes (which is probably done in some places)...not when a seller pre-pays the buyer for future taxes due. But i dunno. good to have a tax preparer for stuff like this

This is a basis issue. The buyer credit reduced the net price of the home that the buyer paid. Doesn't matter how it was itemized. So, when he/she sells, his basis will be $1200 less than it otherwise would have been (and his gain $1200 larger or loss $1200 smaller).

The OP will pay $2100 in taxes in 2017, and that will all be deductible (assuming greater than standard deduction, etc. etc. etc.) for his 2017 taxes.

For the 2016 tax return, there's no income, and no deductible expense.

cestmoi123 said:   This is a basis issue. The buyer credit reduced the net price of the home that the buyer paid. Doesn't matter how it was itemized. So, when he/she sells, his basis will be $1200 less than it otherwise would have been (and his gain $1200 larger or loss $1200 smaller).

The OP will pay $2100 in taxes in 2017, and that will all be deductible (assuming greater than standard deduction, etc. etc. etc.) for his 2017 taxes.

For the 2016 tax return, there's no income, and no deductible expense.

i'm not quite convinced.

"If the seller actually paid for any item for which you are liable and for which you can take a deduction (such as your share of the real estate taxes for the year of sale), you must reduce your basis by that amount unless you are charged for it in the settlement. " 

OP is not liable for what was paid. seller didn't pay OP's share of the taxes.

this may be one of those areas where there is insufficient IRS guidance, and one just picks a path and rolls the dice.



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