Taxes Paid at Settlement

At the closing, it's customary for the seller and the buyer to allocate the real estate taxes for the current year between themselves. If taxes for the year have already been paid, the buyer may have to pay a portion of that amount to the seller; on the other hand, if the taxes for the year are not yet due, the seller will generally give the buyer a credit for the portion that the seller is estimated to owe. Occasionally, one party will agree to pay all taxes for the year.

For federal tax purposes, the actual arrangements made between the buyer and the seller don't matter. Instead, taxes for the year of sale must be divided between the parties on the basis of the number of days each party owned the property during the year. The seller can deduct the taxes up to the date of sale; the buyer can deduct taxes beginning with the date of sale through the rest of the year.

Generally, the seller can claim this deduction in the year of sale; the buyer may claim the deduction only when the tax bill is actually paid - which sometimes means the following year.

Example Gus Pappageorge's property tax year is the same as the calendar year, but the property taxes are not due until the following October 31 (e.g., 2014 taxes are payable by October 31, 2015). On March 2, 2014, Gus sells his home to Joel Page. The annual real estate taxes on the home are $4,500. At closing, Gus’s sale proceeds are adjusted by $5,240 for unpaid taxes (he owned the home for 60 days out of 365; $4,500 x 60/365 = $739.73 plus the 2013 taxes due October 31, 2014). He can deduct the entire amount in 2014. Joel cannot deduct the $4,500 he will pay on October 31, 2014 for the 2013 taxes which was before he owned the home. His deduction amount in 2015 is $3,760 (4,500 - 740).

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