R/E Taxes

[ILLMAS]

TP bought a commercial property, but part of the deal was for TP to pay the outstanding balance of R/E taxes, the R/E taxes were paid before the closing and the title is free and clear of any credits.  Can this amount be expensed to offset part of the rental income TP received or should be capitalized?

[Lee B]

No different than when you assume any other liability linked to real property, it's part of the price you paid.

Therefore capitalize it.

[Pacun]

I thought taxes were expensed every year when paid.

[jklcpa]

cbslee is correct. The taxes in arrears paid by the purchaser must be capitalized as part of the purchase cost.  Taxes are only deductible that are imposed on on the taxpayer. In this case, the taxpayer didn't own the property for the period in arrears; those were assessed on the seller.

[Pacun]

I have been taken out taxes paid and entering them on Sch A from Hud-1. It is never too much and sometimes it is already included on 1098 and I ignore them. I better start checking the dates on those taxes listed on the HUD-1

[jklcpa]

If the taxes are in the purchaser's column of the settlement sheet, it is because those are taxes that are are attributable to the time the purchaser IS the actual owner the property because the taxes were already billed.  Taxes in arrears are different because those can never be during the period when the purchase (new owner) has title.

Example - my state's fiscal year ends 6/30 and r.e.taxes are billed for the coming year 7/1/15-6/30/16 and due 9/30 each year. Let's make the tax bill $2400. If a person purchases that property on 12/1/15, the new owner has title from 12/1/15 - 6/30/16 (7 months of the tax period already billed) that has already been billed and paid by the seller. The settlement sheet for the purchase of the property should include a charge for additional amounts due from the purchaser of 7/12ths of the r.e.taxes due back to the seller for a total of $1400. 

[Terry D EA]

Yep and must be capitalized as a cost of the purchase.