The Cost Basis of Property can be adjusted during
the sale

Read the examples below to see how the Cost Basis of
property can be affected during the sales transaction

Tax Basis of your Property
Real Estate Taxes are usually divided so that you and the seller
each pay taxes for that part of the property tax year that each
owned the home.  If you pay any part of the seller's share of real
estate taxes, and the seller did not reimburse you, you will need to
add those taxes to the cost basis of your home.  You cannot
deduct them as taxes paid.  If the seller paid any of your share of
the real estate taxes, you can deduct those taxes and do not need
to adjust those taxes in your basis only if you reimbursed the
seller.  If you did not reimburse the seller, you must reduce your
basis by the amount of those taxes.

Figuring the Tax Basis of your Home

Example 1:
Geoff and Erika bought a home on October 1.  The real estate tax
in the area they live in is the calendar year, and the tax is due on
September 15.  The real estate taxes on their home were $1,100
for the year and had been paid by the seller on September 15. 
Geoff and Erika didn't reimburse the seller for their share of  the real
estate taxes from October 1 to December 31. 

1) Real Estate Taxes for the property year                 $1,100.00
2) # of days Geoff and Erika owned the property                    92
3) Divide line 2 by 365 (# of days in year)                             .2521
4) Multiply line 1 by line 3.                                                   $   277.31 

Geoff and Erika must reduce the basis of their home by $277.31, the
amount the seller paid for them.  Geoff and Erika can deduct their
$277.31 share of real estate taxes on their return for the year they
purchased their home.

Example 2:
Murray and Cindy purchased a home on April 4, 2007.  The 
property tax in the area is the calendar year.  The taxes for the
previous year are assessed on January 5 and are due on April 29
and November 30.  Under state law, the taxes become a lien on
April 30.  Murray and Cindy agree to pay all the taxes due after the
date of the sale.  The taxes due in 2007 for 2006 were $1,600.  The
taxes in 2008 for 2007 will be $1675.

Murray and Cindy cannot deduct any of the real estate taxes paid
in 2007 because they relate to the 2006 property tax year and they
did not own the home until 2007.  They will add the $1,600 to the
cost basis of their home. 

For 2008:

1) Real Estate Taxes for the property year                   $1,675.00
2) # of days Murray and Cindy owned the property               272
3) Divide line 2 by 365 (# of days in year)                              .7452
4) Multiply line 1 by line 3.                                                    $ 1248.21 

Murray and Cindy can take a deduction of $1248.21 on their tax
return in the year they paid the real estate tax amount.  They would
also add $426.79 ($1,675 - $1,248.21) to the cost basis of their
home the same year.

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prorated real estate tax main