We sold our home last November. During the year we paid property tax on the home, I'll say total of $6,000 for easy math. This is for the 2014 property taxes due in 2015. At closing we had to pay our share of the property taxes for 2015 which would be due in 2016, so we paid say $5,000 at closing. When it comes to Schedule A line 6, would I put the property taxes paid as $6,000 or $11,000? In the IRS instructions it says to reduce my deduction by the portion of property taxes refunded to me by the buyer, but since Illinois pays property taxes in arrears the buyer didn't refund me any tax, I had to pay the buyer my share of the taxes.
For property tax, you deduct the tax in the year that you actually pay it. So if you paid property tax during the year in 2015, and then you paid property tax again in November 2015 at closing (even if it was just to your buyer), you can deduct the total amount on your 2015 taxes.
When your buyer does his taxes, he will have to subtract the $5,000 that you paid him for property tax before he takes his deduction.
I faced this situation a few years back. Property taxes where I live are paid in arrears, so at closing I had to settle on the property taxes that I owed which the buyer would have to pay. I e-mailed IRS TaxHelp (unfortunately no longer available) to ask how this should be handled on my tax returns. This is the response I got:
If you are a cash method taxpayer, you will deduct your real estate taxes in the year they are paid to the taxing authority not when they are assessed. However there is an exception to this when you are the seller of a property. Please read the information listed next.
They then provided information from Pub 17 (individual tax guide):
If you (the seller) cannot deduct taxes until they are paid because you use the cash method of accounting, and the buyer of your property is personally liable for the tax, you are considered to have paid your part of the tax at the time of the sale. This lets you deduct the part of the tax to the date of sale even though you did not actually pay it. However, you must also include the amount of that tax in the selling price of the property. The buyer must include the same amount in his or her cost of the property.
Also, don't forget that you're required to "pro-rate" your deduction based on how long you owned your home. From Pub 523:
You and the buyer must deduct the real estate taxes on your home for the year of sale according to the number of days in the real property tax year (the period to which the tax relates) that each owned the home.
- You are treated as paying the taxes up to, but not including, the date of sale. You can deduct these taxes as an itemized deduction on Schedule A (Form 1040) in the year of sale. It does not matter what part of the taxes you actually paid.
- The buyer is treated as paying the taxes beginning with the date of sale.