Publication 535 |
2001 Tax Year |
Real Estate Taxes
Deductible real estate taxes are any state, local, or foreign taxes
on real estate levied for the general public welfare. The taxing
authority must base the taxes on the assessed value of the real estate
and charge them uniformly against all property under its jurisdiction.
Deductible real estate taxes generally do not include taxes charged
for local benefits and improvements that increase the value of the
property. See Taxes for local benefits, later.
If you use an accrual method, you generally cannot accrue real
estate taxes until you pay them to the government authority. You can,
however, choose to ratably accrue the taxes during the year. See
Choosing to ratably accrue, later.
Taxes for local benefits.
Generally, you cannot deduct taxes charged for local benefits and
improvements that tend to increase the value of your property. These
include assessments for streets, sidewalks, water mains, sewer lines,
and public parking facilities. You should increase the basis of your
property by the amount of the assessment.
You can deduct taxes for these local benefits only if the taxes are
for maintenance, repairs, or interest charges related to those
benefits. If part of the tax is for maintenance, repairs,
or interest, you must be able to show how much of the tax is for these
expenses to claim a deduction for that part of the tax.
Example.
City X, to improve downtown commercial business, converted a
downtown business area street into an enclosed pedestrian mall. The
city assessed the full cost of construction, financed with 10-year
bonds, against the affected properties. The city is paying the
principal and interest with the annual payments made by the property
owners.
The assessments for construction costs are not deductible as taxes
or as business expenses, but are depreciable capital expenses. The
part of the payments used to pay the interest charges on the bonds is
deductible as taxes.
Charges for services.
Water bills, sewerage, and other service charges assessed against
your business property are not real estate taxes, but are deductible
as business expenses.
Purchase or sale of real estate.
If real estate is sold, the real estate taxes must be divided
between the buyer and the seller.
The buyer and 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.
Treat the seller as paying the taxes up to but not including the date
of sale. Treat the buyer as paying the taxes beginning with the date
of sale. You can usually find this information on the settlement
statement you received at closing.
If you (the seller) cannot deduct taxes until they are paid because
you use the cash method 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
up to the date of sale even though you did not pay it. You must also
include the amount of that tax in the selling price of the property.
If you (the seller) use an accrual method and have not chosen to
ratably accrue real estate taxes, you are considered to have accrued
your part of the tax on the date you sell the property.
Example.
Al Green, a calendar year accrual method taxpayer, owns real estate
in X County. He has not chosen to ratably accrue property taxes.
November 30 of each year is the assessment and lien date for the
current real property tax year, which is the calendar year. He sold
the property on June 30, 2001. Under his accounting method he would
not be able to claim a deduction for the taxes because the sale
occurred before November 30. He is treated as having accrued his part
of the tax, 180/365 (January 1-June 29), on
June 30 and he can deduct it for 2001.
Choosing to ratably accrue.
If you use an accrual method, you can choose to accrue real estate
tax related to a definite period ratably over that period.
Example.
John Smith is a calendar year taxpayer who uses an accrual method.
His real estate taxes for the real property tax year, July 1, 2001, to
June 30, 2002, are $1,200. July 1 is the assessment and lien date.
If John chooses to ratably accrue the taxes, $600 will accrue in
2001 ($1,200 × 6/12, July 1-December 31) and
the balance will accrue in 2002.
Separate choices.
You can choose to ratably accrue the taxes for each separate trade
or business and for nonbusiness activities if you account for them
separately. Once you choose to ratably accrue real estate taxes, you
must use that method unless you get permission from the IRS to change.
See Changing, later.
Making the choice.
If you choose to ratably accrue the taxes for the first year in
which you incur real estate taxes, attach a statement to your income
tax return for that year. The statement should show all the following
items.
- The trades or businesses to which the choice applies and the
accounting method or methods used.
- The period to which the taxes relate.
- The computation of the real estate tax deduction for that
first year.
Generally, you must file your return by the due date (including
extensions). However, if you timely filed your return for the year
without choosing to ratably accrue, you can still make the choice by
filing an amended return within 6 months after the due date of the
return (excluding extensions). Attach the statement to the amended
return and write "Filed pursuant to section 301.9100-2" on
the statement. File the amended return at the same address you filed
the original return.
If you choose to ratably accrue for a year after the first year in
which you incur real estate taxes, file Form
3115. Generally, you must file
this form during the tax year for which the choice is to be effective.
For more information, see the instructions for Form 3115.
Changing.
To change your choice to ratably accrue real estate taxes, file
Form 3115 during the tax year for which the change is requested.
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