Question

Fred and Wilma own a home in Bedrock County, which they sold to Barney and Betty on June 30, 2017. On February 1, 2017, Bedrock County levied a property tax of $5,000 on the home for calendar year 2017, which is due on November 1, 2017. Because it is a “buyer’s market” in real estate in the summer of 2017, Fred and Wilma offer to pay the full amount of the property tax for the year as part of the settlement of the sale.

Explain the federal income tax consequences to the sellers and the buyers in regard to the 2017 property tax on the home.

How would your answer above change if it were a “seller’s market” and Barney and Betty agreed to pay the full amount of the property tax when it is due, with no reimbursement due at settlement from the sellers?

Answer 1

a) Federal income tax consequences to the sellers and the buyers in regard to the 2017 property tax on the home-

For federal income tax purposes, property tax division is done on the basis till the time the person owns the property(not including the date of sale). You each can deduct your own share, if you itemize deductions, for the year the property is sold. In our case, Fred and Wilma owns the property till 29th June, 2017.

Total Property tax amount = $5,000

No. of days for which property owned by Fred and Wilma in 2017 = 1jan17 to 29jun17 = 180 days

Total days in year = 365

Thus, property tax that can be claimed as deduction by Fred and Wilma = 5,000 x 180/365 = $2,465.75

For the balance days, property tax can be claimed as deduction by Barney and Betty. Thus, share of Barney and Betty = $5,000 - $2,465.75 = 2,534.25

b)As per the law, the above answer will not changeeven if it is a seller's market and Barney and Betty agreed to pay full amount of property tax. Thus, buyer and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. Both of them can deduct their own share, if they itemize deductions, for the year the property is sold.