Question

Sally owns real property for which the annual property taxes are $9,000. She sells the property to Kate on March 9, 2019, for $550,000. Kate pays the real property taxes for the entire year on October 1, 2019.

a. How much of the property taxes can be deducted by Sally and how much by Kate?

b. What effect does the property tax apportionment have on Kate’s adjusted basis in the property?

c. What effect does the apportionment have on Sally’s amount realized from the sale?

d. How would the answers in parts (b) and (c) differ if Sally paid the taxes?

Answer 1

(a)

Property taxes can be deducted by S and K as follows:

Annual property taxes $9,000

 

Therefore, cost of the property taxes per day = $9,000/365 = $24.657

 

From January 1 to March 9, 2019 is 67 days

S : $24.657*67 days = $1,652 S can deduct this amount

K : $9,000 - $1,652 = $7,348 K can deduct this amount

 

(b)

K adjust the tax amount paid by S as K did not pay that amount and the property value is incresed by $1,652

(S amount as K did not pay)

Cost $550,000 + 1,652 = $551,652 adjuted property value

 

(c)

Selling price $550,000 + $1,652 amount realized $551,652 as S did not pay property taxes and she deducted it

 

(d)

S's amount realized would be her selling prize minus real property taxes apportioned to K

($550,000 - $7,348) = $542,652

 

K's adjusted property value would be her cost minus the real property tax apportioned to her

($550,000 - $7,348) = $542,652

(a)

Property taxes can be deducted by S and K as follows:

Annual property taxes $9,000

 

Therefore, cost of the property taxes per day = $9,000/365 = $24.657