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Sold rental property in 2018. Put money in escrow for real estate taxes. In 2019 I need to give buyer more money for taxes. How to I account for this on my 2019 taxes?

 
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4 Replies

Sold rental property in 2018. Put money in escrow for real estate taxes. In 2019 I need to give buyer more money for taxes. How to I account for this on my 2019 taxes?

Why did you put money in escrow and why do you need to give them more now ?  Usually this is handled on the closing HUD statement where you would give the buyer credit for your portion of the taxes owed up to the closing date.  So this was dealt with on the 2018 return when you sold the property.   Liquidation of the escrow account now is not a taxable event.

Sold rental property in 2018. Put money in escrow for real estate taxes. In 2019 I need to give buyer more money for taxes. How to I account for this on my 2019 taxes?

When the rental property was sold the assessed valuation had increased 60%.  Money was put in escrow to cover the additional taxes.  This money was accounted for during the 2018 tax year.  But the contract stipulated that if the escrow account did not cover the entire tax increase, the seller would give the buyer additional monies.  Final tax bill arrived in July of 2019 and additional money was given to the buyer.  How is this additional payment accounted for on the 2019 tax form?

Carl
Level 15

Sold rental property in 2018. Put money in escrow for real estate taxes. In 2019 I need to give buyer more money for taxes. How to I account for this on my 2019 taxes?

Seems to be a bit of contradiction here in my interpretation.

FIrst you say, "When the rental property was sold the assessed valuation had increased 60%. Money was put in escrow to cover the additional taxes. This money was accounted for during the 2018 tax year. "

Then you ask, "How is this additional payment accounted for on the 2019 tax form?"

If you accounted for it on the 2018 return, then there's nothing to account for in 2019.  If you did not account for it on the 2018 tax return, then since you didn't own the property in 2019 the only possible way to account for it is on SCH A. You'll just include that additional money paid for taxes in the "Your Home" section under the deductions & credits tab in the section for real estate taxes paid. It would be included in the amount on line 5b of the SCH A and will be subject to the SALT limits. Then, until all itemized deductions on the SCH A exceed your standard deduction, they make no difference to your tax liability.

Your only other option I can see is to amend the 2018 return. I myself would investigate the amending alternative first. If the money was placed in escrow in 2018 strictly for property tax purposes, I would think amending the 2018 return would be the better alternative. But I question the legality of it since in general, taxes paid are deducted in the tax year they are actually paid without any regard to what year those taxes are paid *for*. Therefore claiming as such on SCH A for property that you did not own in 2019 would be the safer way to go, provided per the sales contract you were legally obligated to pay those taxes.

Sold rental property in 2018. Put money in escrow for real estate taxes. In 2019 I need to give buyer more money for taxes. How to I account for this on my 2019 taxes?

I agree with your assessment regarding using Schedule A, I have also been advised to use Schedule E because this was a rental activity.

Let me give an example of what occurred regarding this real estate transaction.  $7,000 was put in escrow for real estate taxes.   The sales contract also stipulated that if this was not enough to cover the entire tax bill, then the seller would would give the buyer additional monies.  In July of 2019 the final tax bill was $7,900.  The seller paid the buyer an additional $900.  The original $7,000 was accounted for on the 2018 tax return.  My question is how to account for this on my 2019 tax return?

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