Rental Property Tax

[jbpatel5]

Hello All, 

I just purchased a rental property in Aug 2019. As we all know that at closing, property tax is prorated and divided between buyer and seller. Since property taxes are due at the end of the year, at closing I received a prorated "credit" for property tax from the seller since I will have to pay the property tax for the whole year at the end of this year.

My question is that since I'm paying the whole year worth of property taxes at the end of this year, can I claim the whole tax amount as rental property expense deduction or am I only allowed to take about 5 months worth of tax deduction?

Any help/suggestion would be appreciated.

Thank you! 

[tagteam]

The seller is treated as paying the property taxes up to, but not including, the date of sale. You, as the buyer, are treated as paying the taxes beginning with the date of sale.

Therefore, you can deduct the (roughly) five months worth of taxes you paid.

See https://www.irs.gov/publications/p530#en_US_2018_publink100011841

[TomD8]

You must prorate.  You can only deduct the portion of the property tax that corresponds to your period of ownership.  Since you did not become the owner until August, you can only deduct the portion of the property tax that applies to the time period from the August closing date forward.

The deduction for the portion that occurred prior to the closing date belongs to the seller, even though you may have actually paid the entire year's amount.  That is why the seller provided you with a credit.

[Carl]

While the prior comments are not wrong, how is this "credit" shown exactly on your closing statement? Back in "the day" when lenders used the HUD-1 standard form for closing statements, it was easy to figure this out. But with the change to "supposedly" make things simpler, it very well may not be all that clear cut. So how is this shown on your settlement statement? Is it a HUD-1 closing statement? Or something else? I ask because the HUD-1 form can be used by the lender until their current supply is exhausted.

Basically, what the buyer paid to you for property taxes, I would expect was subtracted from your cost basis. But with the undefined settlement statements in use today, that may not be true.

[jbpatel5]

Thank you for clarification!

[TomYoung]

"Basically, what the buyer paid to you for property taxes, I would expect was subtracted from your cost basis. But with the undefined settlement statements in use today, that may not be true."

I haven't seen a closing statement recently but based on your original post it sounds like the credit for property taxes paid by the seller was readily identifiable.   Of course the credit doesn't affect the cost basis of the property, it affects how much cash and loan you must put into the closing. That seller's credit gets deducted from your end of year payment of taxes, (in an accounting sense, not in the sense that it affects the check amount itself), in coming to the net deduction you claim.