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Selling house - special tax assessments

I am selling my house in San Francisco Bay Area and came across "Special tax assessments" in "Adjusted Cost Basis EasyGuide" section. AFAIK, this is referring to the list of special assessments listed on the back of a property tax bill, e.g, library parcel tax, mosquito asmt #2, safe clean water, SCCO vector control, SCVOSA measure T, sewer sani/storm, etc.

 

Typically, I just included the whole amount on Schedule A, so should I still bother with sorting out what items are qualified for adjusted cost basis or should I not bother since I included the whole amount on Schedule A?

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4 Replies

Selling house - special tax assessments

Well, you can't double dip, so the fact that you deducted them already means you can't add them to your cost basis, even if the deduction was improper.  (Unless you want to go back and amend every tax return you filed since owning the home and paying extra tax that results from the lower deduction.)

 

For future reference, special assessments are deductible as schedule A property taxes if they apply to all similarly situated homes in the community.  Contrary to some instructions, they don't have to be a percentage of the property value–they can be a flat fee–as long as they apply equally to all homes in the area.

 

Special assessments are not deductible, but are added to the cost basis, if they provide a benefit or improvement only to your specific home or only some homes in the area.

 

For example, if every home in the country pays the same library tax, which provides a benefit to the entire community, then the library tax is a deductible property tax on schedule A.  The same would be true for any other services that are of general community benefit.  However, if the sewer assessment only paid for improvements to the sewers under your neighborhood, and other properties don't pay the assessment because their sewers have not been upgraded, then that is a cost basis adjustment and not a schedule A deduction. 

Selling house - special tax assessments

Yeah, that's my understanding as well though SALT being capped at $10,000 means I didn't fully deduct the total value of the assessment. If I hadn't taken the deductions, are you saying that every special assessment would qualify for adding to the cost basis because it would require a lot of work to talk to each party responsible for each assessment to figure out what qualifies and what doesn't. For the record, I talked to a CPA and EA, the CPA said he never added them to the cost basis, just deduct them in Schedule A, the EA didn't even know what I was talking about. I also talked to the City and County and they are similarly as clueless to the details. 

Selling house - special tax assessments

I'm a little worried about your CPA and your EA.  Regardless, the fact that you may have improperly deducted some capital items will drastically muddy the waters if you wanted to use the "tax benefit" rule.

 

This comes into play if you listed an item as a schedule A deduction, that was not an allowable deduction and should have been a capital expense, but you got no actual tax benefit because of the SALT cap.  You might be able to argue that since you got no tax benefit from the deduction, and it should have been a capital expense instead, you would be allowed to add it to the cost basis, because its not double dipping if you got no benefit because of the SALT cap.  But you've already muddied the waters there considerably.  Not only would you have to examine every charge on the property tax bill to determine if it was a deductible tax or a capital expense, you would then have to analyze every tax return to see if you got a tax benefit from the deduction.  And if you owned the property before 2018, there was no cap on SALT in 2017 and earlier, so that affects the tax benefit calculation.

 

The tax assessor is not going to give you tax advice as to whether a charge is a schedule A deduction or a capital expense.  You would have to ask them what the charge is actually for (if it's not obvious from the bill) and then determine for yourself whether it is a property benefit or a community benefit. 

 

I think you need to let it go.  Only property benefits would be allowed to be added to the cost basis, and since you did not keep track, and listed everything on schedule A, you have a lot of work to do to determine if anything that you previously listed, can be added to the cost basis without being accused of double dipping or having to amend your prior returns to reduce the deductions.  It's up to you if you want to put in the work. If you decide to make the adjustments, keep records of all your investigations and calculations for at least 6 years in case of audit. 

 

State and local real property taxes

Deductible real property taxes are generally any state or local taxes on real property levied for the general public welfare. The charge must be uniform against all real property in the jurisdiction at a like rate.

Many states and counties also impose local benefit taxes for improvements to property, such as assessments for streets, sidewalks, and sewer lines. In general, local benefits taxes are deductible only if they're for maintenance, repair, or interest charges related to those benefits. See Taxes for local benefits in Chapter 11 of Publication 17.

Selling house - special tax assessments

Thanks for your advice, you seem to know a lot more than the average EA/CPA which does concern me. Independently, I have come to the same conclusion that it is way too much work to go through 25 years worth of special assessments to determine what's what and adjust taxes, etc, so I will leave it be. Thanks for your help.

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