If you buy or sell real estate, you should be aware of certain rules regarding the deduction for Real Estate Property Taxes in the year of the sale.
As a reminder, for years 2018 through 2025, the overall amount of state and local taxes that are allowed as a deduction for personal federal income tax purposes is Limited to $10,000 ($5,000 for a married individual filing a separate return).
If real property is sold during the “Real Estate Property Tax Year,” the buyer and seller must allocate the real estate taxes for that year between them. The real estate property tax year is generally the period to which the tax relates under the state or local law that imposes the tax.
The taxes must be allocated according to the Number of Days in the real estate property tax year that each individual 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 rule applies whether or not the seller and buyer actually allocate the tax.
If the real estate property tax becomes a Personal Liability or Lien before the beginning of the related real estate property tax year, and the property is sold after the tax becomes a personal liability or lien but before the beginning of the related real estate property tax year;
(1) The Seller Cannot Deduct any Part of the Real Estate Property Taxes for the related real estate property tax year; and
(2) To the extent the buyer holds the property for that real estate property tax year, the buyer may deduct those taxes for the year they are paid or accrued under the Buyer’s Accounting Method.
If the real property tax becomes a personal liability or lien after the end of the related Real Estate Property tax year, and the property is sold before the tax becomes a personal liability or lien but after the end of the related real property tax year;
(1) The buyer cannot deduct any part of the Real Estate Property Taxes for the related real property tax year; and
(2) To the extent the seller holds the property for that real property tax year, the seller may deduct those taxes for the year they are paid or accrued under the Seller’s Accounting Method.
(1) The Buyer is Personally Liable for the real property tax for the real property tax year; or
A Cash Method Seller may deduct the share of real property taxes allocated to the seller under the allocation rule described above for the tax year in which the sale occurs – even though the seller did not actually pay the tax in that year – if either;
(2) The Seller is Liable for the tax and the tax is not payable until after the date of the sale.
The seller also has the option of deducting his or her share of tax for the Year in which the Tax is Actually Paid (if later).
A Cash Basis Buyer may deduct the share of real property taxes allocated to the buyer under the allocation rule described above for the tax year in which the sale occurs – even though the buyer did not actually pay the tax in that year – if the seller is personally liable for the real property tax for the real property tax year. The buyer also has the option of deducting his or her share of tax for the year in which the tax is actually paid (if later).
When the property tax is not a liability of any person, the person who holds the property at the time the tax becomes a lien on the property is considered Liable for the Tax. As to a particular sale, prior or subsequent sales of the property during the real property tax year are disregarded in determining :
(1) Whether the other Party to the Sale is liable for the tax; or
(2) The person who holds the property at the time the tax becomes a Lien on the Property (where the tax is not a liability of any person).
If, for a tax year before the tax year of the sale, a seller has deducted an amount for real property tax in excess of the portion treated as imposed on the seller, the Excess is Included in the Seller’s Gross Income for the tax year of the sale, to the extent the seller received a tax benefit from the deduction.
A special rule applies to a seller or buyer who computes taxable income on an accrual method of accounting for the tax year during which the sale occurs, if the seller or the buyer has not made a Code Section 461(c) Election to accrue certain real estate tax ratably. The portion of any real property tax that is treated as imposed on the taxpayer, and that he or she cannot deduct for any tax year as a result of his or her method of accounting, is treated as having accrued on the date of the sale.
Please call me at your convenience if you are considering the Sale or Purchase of Real Property so we can discuss your deduction for real estate taxes in more detail.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
Cell: (760)567-3110
Fax: (760)836-0968
Email: DonFitchCPA@paylesstax.com
Website: https://www.paylesstax.com
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 06122021-1 320-830)