Question

Sally owns real property for which the annual property taxes are 9,000. She sells the property to Shelley on March 1 for550,000. Shelley pays the real property taxes for the entire year on October 1.

a. How much of the property taxes can be deducted by Sally and how much by Shelley?
b. What effect does the property tax apportionment have on Shelley's adjusted basis in the property?
c. What effect does the apportionment have on Sally's amount realized from the sale?
d. How much would the answers in (b) and (c) differ if the taxes were paid by Sally?

Answer 1

Sally can deduct $1,500 of property taxes, and Shelley can deduct $7,500. Shelley's adjusted basis increases by $7,500, while tax apportionment does not change Sally's amount realized unless sale price adjustments are made.

Step-by-step explanation:

Sally can deduct property taxes for the portion of the year she owned the property, and Shelley can deduct the remaining months after purchase. Specifically, Sally is responsible for January and February, equating to 2/12 of the annual taxes, and Shelley is responsible for March through December, which is 10/12 of the taxes. When Shelley pays the property taxes, the payment will affect her adjusted basis in the property.

a. Sally can deduct $1,500 (2/12 of $9,000) and Shelley can deduct $7,500 (10/12 of $9,000).

b. Shelley's adjusted basis in the property will increase by the amount of property taxes she pays ($7,500).

c. The property tax apportionment does not affect Sally's amount realized from the sale unless they agree to adjust the sale price based on tax prorations.

d. If Sally had paid the taxes, her adjusted basis in the property would not change, but her amount realized from the sale would effectively be reduced by the amount she paid in taxes.