Property Tax Lien payment impact on Tax Returns

[hcjontax]

If I paid $100,000 for a New Jersey property tax lien that was due in 2020, how would this impact the my 2020 Federal and State tax return? Where would this be included in a person's tax return or small business filing for a potential credit/deduction?

Thank You,

[Critter-3]

There is nothing to deduct on an income tax return when you just buy the lien.   This is an investment not an expense. 

[hcjontax]

I was not buying or investing in a tax lien. A tax lien was due on the property which had not been paid for 2 years. I made the payment so that the property would not foreclose.

[Opus 17]

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@hcjontax wrote:

I was not buying or investing in a tax lien. A tax lien was due on the property which had not been paid for 2 years. I made the payment so that the property would not foreclose.

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You can't deduct property taxes--either as a personal expense or a business expense--unless you are the legal owner of the property who is legally obligated to pay the taxes.  

If you are the legal owner, then you deduct the property taxes in the year you pay them, regardless of when the taxes were imposed or accrued.  

[hcjontax]

Yes ofc I am the owner of the property. So I paid the $100K property tax lien for the property in 2020, and so I can have a $100K deduction on my individual tax return?

[Opus 17]

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@hcjontax wrote:

Yes ofc I am the owner of the property. So I paid the $100K property tax lien for the property in 2020, and so I can have a $100K deduction on my individual tax return?

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That depends if it is personal or business property. You can deduct property taxes on any property you own on your personal return, but the 2018 tax reform law caps all state and local tax deductions at $10,000 (including property tax, income tax and sales tax).  You can list the entire amount because it might be deductible on your NJ state return (although probably not, you can't usually deduct state taxes on a state tax return) but your federal deduction will be capped at $10,000.

If this is business property, you will get a much better tax benefit if you deduct the tax against your business income because it's not capped. 

If this is future business property, you may want to capitalize the taxes.  That means adding them to the cost of the building, which will increase your depreciation expense.  You would recover the taxes over 39 years of business depreciation, but that might be better than having your deduction capped at $10K and losing the rest of the deduction forever. 

[hcjontax]

Thank you Opus. I clarified the situation below:

1.) Mother paid -$100,000 for unpaid property tax lien in 2020
2.) Property was not primary residence and title is under mothers name
3.) Mother operated a small business from the property

Should the payment of the property tax lien be recorded in her individual tax return as it relates to the property she owns? or should it be included as part of the business 1065 partnership return as that is the only tenant inside the property, and the property is for business purposes?

Reading your prior comment, it seems it would be best to include this under the business 1065 partnership as an expense?

Thank You