Property Tax Deduction in Illinois After Home Sale

Question

We sold our condo last year in Chicago. Whether this is common knowledge or not, Illinois residents pay property taxes in arrears.

At the closing, the seller pre-pays a prorated amount of taxes for the upcoming year's bill. So since we closed in September 2012, we paid 9/12ths of the taxes for 2012 (to be billed in 2013) to the buyer at closing. This also included a 5 or 10% increase (standard practice).

It's actually slightly more complicated, since the tax bill is paid in two installments, and I had already paid the first installment.

It would make sense that I can deduct this when I do my 2012 income taxes. However, I can't find a good source that this is indeed the law, how it gets reported to the IRS, and how to document it.

Can someone point me toward the relevant tax law or forms?

Answer 1

You sold in 2012?

You paid in 2012?

You take this on your 2012 tax return, as you are a cash basis individual. Especially for the fact that by closing in 2012, everything should be reconciled in that year, nothing that I am aware of would carry into 2013.

Answer 2

The IRS gives guidance only for what the buyer is allowed to do with regard to real estate taxes. Publication 530, 2011 edition, says the following (where I have added emphasis to point out the similarity to the Illinois real estate taxes)

You bought your home on May 3, 2011. The property tax year in your area is the calendar year. The taxes for the previous year are assessed on January 2 and are due on May 31 and November 30. Under state law, the taxes become a lien on May 31. You agreed to pay all taxes due after the date of sale. The taxes due in 2011 for 2010 were $1,375. The taxes due in 2012 for 2011 will be $1,425.

You cannot deduct any of the taxes paid in 2011 because they relate to the 2010 property tax year and you did not own the home until 2011. Instead, you add the $1,375 to the cost (basis) of your home.

You owned the home in 2011 for 243 days (May 3 to December 31), so you can take a tax deduction on your 2012 return of $949 [(243 ÷ 365) × $1,425] paid in 2012 for 2011. You add the remaining $476 ($1,425 − $949) of taxes paid in 2012 to the cost (basis) of your home.

Extrapolating from this, I would say that for a sale in 2012, on his 2012 tax return (due in three months time), the seller (OP) can deduct all the real estate tax for 2011 (assessed in 2012, due in 2012, and paid in 2012) regardless of whether the buyer or seller made the actual payment(s) during 2012. The taxes for the January 2012 - September 2012 period (which will be assessed in early 2013 and payable during 2013) and for which the seller has paid the buyer at the time of closing reduce the capital gains made on the house by the seller and increase the basis for the buyer. Neither the buyer nor the seller can deduct the real estate taxes for this period (January 2012 - September 2012) on their 2013 income tax returns.

Answer 3

To determine how much to deduct regarding property taxes:

• If you had an escrow account with a lender

  1. they will report to you each year how much of your total payment was for interest, and how much for taxes, and how much for insurance and principal.
  2. They should have also given you a statement related to closing the account. They should have refunded any money still in the escrow account.

• If you didn't have an escrow account use the tax bill/receipt from the local government for that first payment.

• Your HUD-1 closing documents will also specify any taxes for the partial year, and any partial month interest.

• Just make sure you aren't double counting any of the amounts or skipping an amount.