Real Estate Taxes

Deductible real estate taxes are any state, local, or foreign taxes on real property levied for the general public welfare. The taxes must be based on the assessed value of the real property and must be charged uniformly against all property under the jurisdiction of the taxing authority.

Deductible real estate taxes generally do not include taxes charged for local benefits and improvements that increase the value of the property. They also do not include itemized charges for services (such as trash collection) to specific property or people, even if the charge is paid to the taxing authority. For more information about taxes and charges that are not deductible, see Real Estate-Related Items You Cannot Deduct, later.

Tenant-shareholders in a cooperative housing corporation. Generally, you can deduct your share of the real estate taxes the corporation paid or incurred on the property. The corporation should provide you with a statement showing you your share of the taxes. For more information, see Special Rules for Cooperatives in Publication 530.

Buyers and sellers of real estate. If you bought or sold real estate during the year, the real estate taxes must be divided between the buyer and the seller.

The buyer and the seller must divide the real estate taxes according to the number of days in the real property tax year (the period to which the tax imposed relates) that each owned the property. The seller is treated as paying the taxes up to, but not including, the date of sale. The buyer is treated as paying the taxes beginning with the date of sale. This applies regardless of the lien dates under local law. Generally, this information is included on the settlement statement provided at the closing.

If you (the seller) cannot deduct taxes until they are paid because you use the cash method of accounting, and the buyer of your property is personally liable for the tax, you are considered to have paid your part of the tax at the time of the sale. This lets you deduct the part of the tax to the date of sale even though you did not actually pay it. However, you must also include the amount of that tax in the selling price of the property. The buyer must include the same amount in his or her cost of the property.

You figure your deduction for taxes on each property bought or sold during the real property tax year as follows.

Delinquent taxes. Do not divide delinquent taxes between the buyer and seller if the taxes are for any real property tax year before the one in which the property is sold. Even if the buyer agrees to pay the delinquent taxes, the buyer cannot deduct them. The buyer must add them to the cost of the property. The seller can deduct these taxes paid by the buyer. However, the seller must include them in the selling price.

Examples. The following examples illustrate how real estate taxes are divided between buyer and seller.

Example 1. Dennis and Beth White's real property tax year for both their old home and their new home is the calendar year, with payment due August 1. The tax on their old home, sold on May 7, was $620. The tax on their new home, bought on May 3, was $732. Dennis and Beth are considered to have paid a proportionate share of the real estate taxes on the old home even though they did not actually pay them to the taxing authority. On the other hand, they can claim only a proportionate share of the taxes they paid on their new property even though they paid the entire amount.

Dennis and Beth owned their old home during the real property tax year for 126 days (January 1 to May 6, the day before the sale). They figure their deduction for taxes on their old home as follows.

Taxes On Old Home

Since the buyers of their old home paid all of the taxes, Dennis and Beth also include the $214 in the selling price of the old home. (The buyers add the $214 to their cost of the home.)

Dennis and Beth owned their new home during the real property tax year for 243 days (May 3 to December 31, including their date of purchase). They figure their deduction for taxes on their new home as follows.

Taxes On New Home

Since Dennis and Beth paid all of the taxes on the new home, they add $244 ($732 paid less $488 deduction) to their cost of the new home. (The sellers add this $244 to their selling price and deduct the $244 as a real estate tax.)

Dennis and Beth's real estate tax deduction for their old and new homes is the sum of $214 and $488, or $702. They will enter this amount on line 6 of Schedule A (Form 1040).

Example 2. George and Helen Brown bought a new home on May 3, 2001. Their real property tax year for the new home is the calendar year. Real estate taxes for 2000 were assessed in their state on January 1, 2001. The taxes became due on May 31, 2001, and October 31, 2001.

The Browns agreed to pay all taxes due after the date of purchase. Real estate taxes for 2000 were $680. They paid $340 on May 31, 2001, and $340 on October 31, 2001. These taxes were for the 2000 real property tax year. The Browns cannot deduct them since they did not own the property until 2001. Instead, they must add $680 to the cost of their new home.

In January 2002, the Browns receive their 2001 property tax statement for $752, which they will pay in 2002. The Browns owned their new home during the 2001 real property tax year for 243 days (May 3 to December 31). They will figure their 2002 deduction for taxes as follows.

The remaining $251 ($752 paid less $501 deduction) of taxes paid in 2002, along with the $680 paid in 2001, is added to the cost of their new home.

Because the taxes up to the date of sale are considered paid by the seller on the date of sale, the seller is entitled to a 2001 tax deduction of $931. This is the sum of the $680 for 2000 and the $251 for the 122 days the seller owned the home in 2001. The seller must also include the $931 in the selling price when he or she figures the gain or loss on the sale. The seller should contact the Browns in January 2002 to find out how much real estate tax is due for 2001.

Form 1099-S. For certain sales or exchanges of real estate, the person responsible for closing the sale (generally the settlement agent) prepares Form 1099-S, Proceeds From Real Estate Transactions, to report certain information to the IRS and to the seller of the property. Box 2 of the form is for the gross proceeds of the sale and should include the portion of the seller's real estate tax liability that the buyer will pay after the date of sale. The buyer includes these taxes in the cost basis of the property, and the seller both deducts this amount as a tax paid and includes it in the sales price of the property.

For a real estate transaction that involves a home, any real estate tax the seller paid in advance but that is the liability of the buyer appears in box 5 of Form 1099-S. The buyer deducts this amount as a real estate tax, and the seller reduces his or her real estate tax deduction (or includes it in income) by the same amount. See Refund (or rebate), later.

Taxes placed in escrow. If your monthly mortgage payment includes an amount placed in escrow (put in the care of a third party) for real estate taxes, you may not be able to deduct the total amount placed in escrow. You can deduct only the real estate tax that the third party actually paid to the taxing authority. If the third party does not notify you of the amount of real estate tax that was paid for you, contact the third party or the taxing authority to find the proper amount to show on your return.

Tenants by the entirety. If you and your spouse held property as tenants by the entirety and you file separate returns, each of you can deduct only the taxes each of you paid on the property.

Divorced individuals. If your divorce or separation agreement states that you must pay the real estate taxes for a home owned by you and your spouse, part of your payments may be deductible as alimony and part as real estate taxes. See Publication 504, Divorced or Separated Individuals, for information.

Minister's and military personnel housing allowances. If you are a minister or a member of the uniformed services and receive a housing allowance that you can exclude from income, you still can deduct all of the real estate taxes you pay on your home.

Refund (or rebate). If you receive a refund or rebate in 2001 of real estate taxes you paid in 2001, you must reduce your deduction by the amount refunded to you. If you receive a refund or rebate in 2001 of real estate taxes you deducted in an earlier year, you generally must include the refund or rebate in income in the year you receive it. However, you only need to include the amount of the deduction that reduced your tax in the earlier year. For more information, see Recoveries in chapter 13.

If you did not itemize deductions in the year you paid the tax, do not report the refund as income.

Table 24-1. Which Taxes Can You Deduct?

	You Can Deduct	You Cannot Deduct
Income Taxes	State and local income taxes. Foreign income taxes. Employee contributions to state funds   listed under Contributions to state   benefit funds.	Federal income taxes. Employee contributions to private or   voluntary disability plans.
Real Estate Taxes	State and local real estate taxes. Foreign real estate taxes. Tenant's share of real estate taxes   paid by cooperative housing   corporation.	Taxes for local benefits (with   exceptions). Trash and garbage pickup fees (with   exceptions). Rent increase due to higher real   estate taxes. Homeowners association charges.
Personal Property Taxes	State and local personal property   taxes.
Other Taxes	Taxes that are expenses of your trade   or business or of producing income. One-half of self-employment tax paid. Taxes on property producing rent or   royalty income. Occupational taxes.	Many taxes, such as state and local   sales taxes and federal excise   taxes. See Taxes and Fees You   Cannot Deduct.
Fees and Charges	Fees and charges that are expenses   of your trade or business or of   producing income.	Fees and charges, such as fees for   driver's licenses or charges for   water bills. See Taxes and Fees   You Cannot Deduct.

Real Estate-Related Items You Cannot Deduct

Payments for the following items generally are not deductible as real estate taxes.

• Taxes for local benefits.
• Itemized charges for services (such as trash and garbage pickup fees).
• Transfer taxes (or stamp taxes).
• Rent increases due to higher real estate taxes.
• Homeowners' association charges.

Taxes for local benefits. Deductible real estate taxes generally do not include taxes charged for local benefits and improvements that increase the value of your property. These include assessments for streets, sidewalks, water mains, sewer lines, public parking facilities, and similar improvements. You should increase the basis of your property by the amount of the assessment.

Local benefit taxes are deductible only if they are for maintenance, repair, or interest charges related to those benefits. If only a part of the taxes is for maintenance, repair, or interest, you must be able to show the amount of that part to claim the deduction. If you cannot determine what part of the tax is for maintenance, repair, or interest, none of it is deductible.

Taxes for local benefits may be included in your real estate tax bill. If your taxing authority (or mortgage lender) does not furnish you a copy of your real estate tax bill, ask for it. You should use the rules above to determine if the local benefit tax is deductible.

Itemized charges for services. An itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority. For example, you cannot deduct the charge as a real estate tax if it is:

• A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use),
• A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged to each homeowner for trash collection), or
• A flat fee charged for a single service provided by your government (such as a $30 charge for mowing your lawn because it was allowed to grow higher than permitted under your local ordinance).

You must look at your real estate tax bill to determine if any nondeductible itemized charges, such as those just listed, are included in the bill. If your taxing authority (or mortgage lender) does not furnish you a copy of your real estate tax bill, ask for it.

Exception. Service charges used to maintain or improve services (such as trash collection or police and fire protection) are deductible as real estate taxes if:

1. The fees or charges are imposed at a like rate against all property in the taxing jurisdiction,
2. The funds collected are not earmarked; instead, they are commingled with general revenue funds, and
3. Funds used to maintain or improve services are not limited to or determined by the amount of these fees or charges collected.

Transfer taxes (or stamp taxes). Transfer taxes and similar taxes and charges on the sale of a personal home are not deductible. If they are paid by the seller, they are expenses of the sale and reduce the amount realized on the sale. If paid by the buyer, they are included in the cost basis of the property.

Rent increase due to higher real estate taxes. If your landlord increases your rent in the form of a tax surcharge because of increased real estate taxes, you cannot deduct the increase as taxes.

Homeowners' association charges. These charges are not deductible because they are imposed by the homeowners' association, rather than the state or local government.

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