Tax Question--Arrears property taxes (pay, credit, income, mortgage)

[Winter01]

So we just received our property tax bill for 2013 due in 2014. We bought our house in March and the seller gave us a credit for the partial year-Jan-March. When filing our Federal return for 2013 do we enter the entire 2013 property tax amount even though it is not paid until 2014? Or should we enter the 2013 property taxes paid on our 2014 return since they are technically paid in 2014? If we do enter it on the 2013 return do we include the entire property tax amount or the yearly tax amount less the credit we received at closing. I guess I don't see how they could have known the appropriate credit amount when we bought the house considering the formal finalized 2013 bill just arrived today.

Can anyone explain this in more detail to me?

[reed303]

You need to read IRS Pub 530 at Publication 530 (2013), Tax Information for Homeowners
where it says:

"Real estate taxes paid at settlement or closing. Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. Your share of these taxes is fully deductible if you itemize your deductions.

Division of real estate taxes. For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. You (the buyer) are 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 you get at closing. You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. You each can deduct your own share, if you itemize deductions, for the year the property is sold.

Example.
You bought your home on September 1. The property tax year (the period to which the tax relates) in your area is the calendar year. The tax for the year was $730 and was due and paid by the seller on August 15.
You owned your new home during the property tax year for 122 days (September 1 to December 31, including your date of purchase). You figure your deduction for real estate taxes on your home as follows.
1. Enter the total real estate taxes for the real property tax year = $730
2. Enter the number of days in the property tax year that you owned the property = 122
3. Divide line 2 by 365 = .3342
4. Multiply line 1 by line 3. This is your deduction. Enter it on Schedule A (Form 1040), line 6 = $244

You can deduct $244 on your return for the year if you itemize your deductions. You are considered to have paid this amount and can deduct it on your return even if, under the contract, you did not have to reimburse the seller."

You will notice that the example does not care what the actual amounts were on your closing settlement documents. You take credit for the pro-ration of the actual amount billed for the year.

[Thepreacherswife]

Almost all individual taxpayers are on the cash basis, so what you put on your tax return as income or deductions for a given year is based on what you actually received or paid out of pocket. In your case, you didn't pay any taxes in 2013 - in fact, you got money from the seller to pay for "their share" of the 2013 taxes. A "negative deduction", if you will. The seller figured their share based on an estimate of the 2013 taxes (probably based on the 2012 taxes) and there's probably no provision for a "true-up".

Let's say the seller gave you $500 as credit for the 2013 taxes, and the actual bill was $2200, which you pay in 2014. If you and the seller do things correctly, here's what your tax returns should look like for 2013 and 2014:

Seller:
2013 - $500 deduction
2014 - no deduction

You
2013 - no deduction
2014 - $1700 deduction ($2200 payment less $500 seller credit)

Make sense?

[midwestlaxer]

Originally Posted by Thepreacherswife

Almost all individual taxpayers are on the cash basis, so what you put on your tax return as income or deductions for a given year is based on what you actually received or paid out of pocket. In your case, you didn't pay any taxes in 2013 - in fact, you got money from the seller to pay for "their share" of the 2013 taxes. A "negative deduction", if you will. The seller figured their share based on an estimate of the 2013 taxes (probably based on the 2012 taxes) and there's probably no provision for a "true-up".

Let's say the seller gave you $500 as credit for the 2013 taxes, and the actual bill was $2200, which you pay in 2014. If you and the seller do things correctly, here's what your tax returns should look like for 2013 and 2014:

Seller:
2013 - $500 deduction
2014 - no deduction

You
2013 - no deduction
2014 - $1700 deduction ($2200 payment less $500 seller credit)

Make sense?

this is true in Illinois but not Colorado.

I am from Colorado...GO BRONCOS!!!!!....you can deduct what you paid that year, however, in Illinois you have to wait until the following year to claim your tax deduction for Real Estate Taxes.

I tried to claim the property taxes for the 6 months I lived here in IL in 2010...I got my refund and then a week letter got a letter from the IL DOR that I was allowed the tax deduction because it was not mine to take. But in 2011 I could take the deduction for 2010. Lame, I know.

[Winter01]

Originally Posted by midwestlaxer

this is true in Illinois but not Colorado.

I am from Colorado...GO BRONCOS!!!!!....you can deduct what you paid that year, however, in Illinois you have to wait until the following year to claim your tax deduction for Real Estate Taxes.

I tried to claim the property taxes for the 6 months I lived here in IL in 2010...I got my refund and then a week letter got a letter from the IL DOR that I was allowed the tax deduction because it was not mine to take. But in 2011 I could take the deduction for 2010. Lame, I know.

Yay Broncos!! I swear, we just moved back to Colorado and I do believe Broncos fans are the most intense football fans. Love it !! Some neighbors have the front of their homes lit up with orange and blue lights.

Back to topic--- so are you saying I should be able to claim the 2013 property taxes on my 2013 return less the credit from the sellers? Technically I have paid out the money because it is being deducted by my mortgage company for the escrow account.

[midwestlaxer]

Originally Posted by Winter01

Yay Broncos!! I swear, we just moved back to Colorado and I do believe Broncos fans are the most intense football fans. Love it !! Some neighbors have the front of their homes lit up with orange and blue lights.

Back to topic--- so are you saying I should be able to claim the 2013 property taxes on my 2013 return less the credit from the sellers? Technically I have paid out the money because it is being deducted by my mortgage company for the escrow account.

in Colorado...yes. It should be listed on your 1098.

good luck.