What are Prorated Property Taxes

Prorated Property Taxes, Real Estate Taxes, can affect you when you purchase a property so buyers and sellers of property need to be aware of “Prorated Property Taxes”. Prorated Real Estate Taxes can affect both the Buyer and the Seller when a sale occurs.

Real Estate Taxes are generally divided so that you and the seller each pay property taxes for the part of the tax year that you owned the home. Your share of these real estate taxes is fully deductible when you itemize your deductions.

Prorated Property Taxes – Division of Real Estate Taxes
For federal income tax purposes, the seller is treated as paying the property taxes up to the date of the sale. As the buyer, you are treated as paying taxes beginning with the date of sale. This rule applies regardless of who pays the tax.

If the seller has already paid the annual property taxes, the buyer typically reimburses the seller for the period in which the buyer will be occupying the property. Likewise, if the taxes have not been paid, the seller typically reimburses as the buyer for the period in which the buyer occupied the property.

Buyer’s and Seller’s Share of Property Taxes
When you purchase a home you need to be sure that you get your share of the real estate tax deduction. At the same time you need to make sure the seller gets charged for their proper share of the year’s real estate taxes as well. If you don’t do this you may end up having to pay part of the seller’s real estate tax. To make matters worse, you can’t deduct your payment for the sellers share of the tax burden!!!

The settlement statement you get at closing generally controls how the real estate taxes are apportioned between the seller and buyer. The statement should clearly state how the real estate taxes for the year are prorated between the two parties. As stated above, the seller should be charged with the amount of tax from the beginning of the real property tax year to the date of closing. The buyer should be charged with the balance of the tax to the end of the real property tax year. Thus, each party is responsible for their share of the real estate tax during the real property tax year.

Seller’s Property Tax Deduction in Excess of Allocated Amount is Taxed
If, in the year before the sale of property, the seller deducts an amount for taxes in excess of the allocated amount, the seller must report the excess as income in the year of the sale. This may happen when the seller is on the cash basis and pays the tax in the year before the sale.

Buyer Cannot Deduct Payment of Seller’s Back Property Taxes
If you agree to pay the seller’s, delinquent taxes as part of your purchase, the back taxes paid are added to your cost of the property. The amount realized on the sale by the seller is increased by your payment of the back taxes.

IRS Guidelines are Strict
If the property taxes for the real property tax year have not been paid on the date that the sale of the home is closed and if the contract doesn’t specify for prorating at closing, the buyer will have to pay the real estate taxes in full. It doesn’t matter that the seller owned the property for part of the real property tax year. It gets worse; the seller can deduct the share of real estate taxes that the buyer paid. The IRS guidelines are strict. The buyer can deduct only their share of the property tax, not the entire amount they paid. One thing to note in the scenarios above is that the buyer can add those taxes to their cost basis in the home if the seller doesn’t reimburse them for their share of the tax burden.

Delinquent Real Estate Taxes
If part of your purchase has to do with delinquent taxes, as the saying goes, buyer beware. Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. If you agree to pay delinquent taxes when you purchase your home, you cannot deduct them. The delinquent taxes are treated as part of the cost of your home and added to the cost basis.

Property Taxes and Foreclosed Property
If you buy real estate at a tax sale and you do not receive immediate title to the property under state law until after a redemption period, you may not be able to deduct payment of property taxes for several years.

See examples of adjusting the cost basis of your home.